Rev. Proc. 2023-08 provides guidance for taxpayers to obtain automatic consent to change their method of accounting for research and experimental (R&E) expenditures under IRC §174.
For taxable years beginning after December 31, 2021, specified R&E expenditures under IRC §174 must be capitalized and amortized over five years (15 years for research conducted outside the United States). (TCJA §13206)
Under the TCJA, the change from deducting R&E expenditures to capitalizing them is defined as a change in accounting method that is applied on a cutoff basis for any R&E expenditures paid or incurred in taxable years beginning after December 31, 2021. The law does not allow for adjustments under IRC §481 to be made.
Rev. Proc. 2023-08 provides an automatic change in method of accounting procedure for taxpayers to comply with IRC §174 by filing a statement with the taxpayer’s original federal income tax return for the first taxable year in which the TCJA’s IRC §174 changes become effective instead of filing Form 3115, Application for Change in Accounting Method. This provides a simplified, and welcome, way to change an accounting method.
Taxpayers who make a change in method of accounting for R&E expenditures after their first taxable year in which the TCJA’s IRC §174 changes become effective cannot apply the simplified relief provided in Rev. Proc. 2023-08, but instead must file Form 3115 in that subsequent taxable year.
The statement must include specified information. We have created a sample statement which will be provided to all of Spidell’s Federal and California Tax Update seminar and webinar attendees.
Any items arising before the year of change must still be accounted for under the taxpayer’s former method of accounting.
Sign up for Spidell’s 2022/23 Federal and California Tax Update to spend one day with us and be ready for tax season. Click here for a list of in-person seminar locations.