Long-awaited guidance provided for amortization of R&E expenditures
The IRS intends to issue proposed regulations governing the capitalization and amortization of specified research and experimental (SRE) expenditures under amendments to Sec. 174 made by the law known as the Tax Cuts and Job Act (TCJA), P.L. 115-97, the treatment of SRE expenditures under Sec. 460, and the application of Sec. 482 to cost-sharing arrangements involving SRE expenditures, the Service said in Notice 2023-63, which was issued Friday.
In the meantime, taxpayers and tax professionals can rely on interim guidance provided in the notice on which the proposed regulations will be based.
Before the TCJA amendments, taxpayers could expense research and experimentation costs currently, or capitalize the costs, or capitalize and amortize them over a period of not more than 60 months. Under Sec. 174 as amended, taxpayers must amortize them over five years for domestic expenditures, or 15 years for SRE expenditures attributed to foreign research, using a half-year convention.
The guidance covers seven areas:
With one exception, a taxpayer may choose to rely on the rules described in the notice, including for expenditures paid or incurred in tax years beginning after Dec. 31, 2021, provided the taxpayer relies on the rules and applies them in a consistent manner. The guidance cannot be relied on for rules regarding SRE expenditures for property that is contributed to, distributed from, or transferred from a partnership, the IRS said.
The TCJA, enacted in 2017, become effective for tax years beginning after Dec. 31, 2021, so tax professionals have pushed the IRS for guidance. The AICPA previously submitted comments on May 10 requesting guidance on the Sec. 174 method. And it continues to advocate to Congress on extending the Sec. 174 expensing treatment, including comments submitted to Congress on May 9, 2023, and Feb. 14, 2023.
The guidance does not apply when determining whether an expenditure paid or incurred for tax years beginning before Jan. 1, 2022, is a research or experimental expenditure under Sec. 174 as in effect for tax years beginning before Jan. 1, 2022.