Revenue Procedure 2023-8 was issued as an advance version on December 12, 2022 to provide the details of the process required for taxpayers requesting an automatic consent to change the accounting method for specified research and experimental (R&E) expenditures. These changes were necessary to comply with the amended section of Internal Revenue Code Section 174. The Tax Cuts and Jobs Act (TCJA) of 2017 amended Section 174(a)(2) to require capitalization of specified R&E expenses with amortization allowed over five years if performed in the U.S. This section of the TCJA is effective for tax years beginning after 2021. Foreign expenses must be amortized over 15 years. In both cases, amortization must start at the midyear of the year the expenditures are paid or incurred.
The purpose of the Revenue Procedure is to provide guidance regarding automatic method change procedures to implement the new capitalization and amortization rules under Section 174. This method change will be done on a cut-off method; therefore, no Section 481(a) adjustment is utilized. Additionally, it is specifically stated that R&E covered under this Revenue Procedure includes software development costs. Under this Revenue Procedure, the automatic method change only applies to specified R&E expenses paid or incurred in taxable years beginning after 2021, with different procedures depending on the year the change is requested.
Option 1 if Implemented in the First Year Beginning After 2021
If the taxpayer is requesting the change for the first taxable year beginning after 2021, the taxpayer may take advantage of a simplified filing process and a waiver of the prior five-year scope limitation. The general limitation limited a method change for the same item within five years. This waiver allows those taxpayers who previously filed method changes for software development costs to still make this change to apply the new Section 174 rules. By requesting the change in this first taxable year after 2021, the taxpayer can also avoid filing Form 3115, Application for Change in Accounting Method, and attach a statement to the tax return for the year of change. The statement must include the following information:
- The name and employer identification number or social security number of the applicant;
- The beginning and ending dates of the tax year of change;
- The designated accounting method change number (265);
- A description of the type of expenditures included in the change as specified R&E expenses;
- The amount of specified R&E expenses paid or incurred in the year of change; and
- A statement that the applicant is changing the method of accounting for specified R&E expenses on a cut-off basis, without a Section 481(a) adjustment. In addition, the applicant must include in the statement that under the new method the applicant will capitalize those expenses and amortize appropriately over five or 15 years, beginning with the midpoint of the taxable year in which the expenses were paid or incurred.
Option 2 if Implemented in a Year Other Than the First Year Beginning After 2021
If the taxpayer chooses to make the change for a year other than the first taxable year after 2021, Form 3115 must be filed to include all required information. In addition, no waiver will be provided if the taxpayer has previously requested a change in accounting method for the same item within five years.
Under both options, no audit protection is provided for costs paid or incurred in taxable years beginning before 2022.
Please contact your Ryan tax professionals to discuss how this new process could affect your business or if you need assistance with accumulating the covered R&E expenditures or with the statement that is required.
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- Income Tax