In Notice 2023-63 the IRS provides some, but not all, of the anticipated guidance that taxpayers have been waiting for concerning:
- What is an IRC §174 specified research or experimental expense (SRE) for expenditures incurred in post-2021 taxable years; and
- How these expenses should be amortized.
The IRS will be issuing proposed regulations consistent with this guidance but will generally allow taxpayers to apply most of this guidance retroactively beginning with the 2022 taxable year.
Highlights of the guidance include:
- Defining SRE expenditures as those defined in current Treas. Regs. §1.174-2. Although the guidance provides a listing of what does and what does not constitute SRE expenses, it provides no additional clarity as to when a taxpayers’ activities constitute research or experimentation;
- Providing a list of costs that are not treated as SRE expenses, including, but not limited to:
- General and administrative services, such as payroll, human resources, and accounting;
- Interest on debt to finance research activities;
- Various website and software costs (e.g., certain costs associated with installing and maintaining software for internal use); and
- Amortization of SRE expenses paid or incurred prior to 2022;
- Providing a nonexhaustive list of items that are SRE expenses (e.g., labor costs, materials and supplies, cost recovery allowances including depreciation expense [even those incurred prior to 2022], and certain operation and management costs);
- Clarifying that all expenditures paid or incurred in connection with the development of any computer software are per se SREs. The guidance provides an expansive definition of computer software and clarifies what does not constitute computer software expenses (e.g., rollout and maintenance costs for software developed for internal use and marketing and promotional costs of software developed for sale/licensing);
- Specifying how shared costs should be allocated between SRE and non-SRE expenses;
- Allowing a corporation to deduct all unamortized SRE expenditures in its final taxable year. However, in an IRC §381(a) corporate acquisition, the acquiring corporation must continue amortizing SRE expenses of the acquired corporation;
- Addressing the treatment of SREs associated with a long-term contract that is accounted for using the percentage of completion method; and
- Clarifying the application of IRC §482 to cost-sharing arrangements involving SRE expenditures.
Until the IRS issues additional guidance as to how taxpayers may obtain automatic consent to change methods of accounting related to this guidance, taxpayers may utilize the procedures outlined in Section 7.02 of Rev. Proc. 2023-24 to change their methods of accounting to comply with this guidance.
The IRS is asking taxpayers and tax professionals to provide comments concerning this guidance by November 23, 2024.
Notice 2023-63 is available at:
www.irs.gov/pub/irs-drop/n-23-63.pdf
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