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IRS notice 2023 and how it impacts R&D tax credits

Today, the IRS has unveiled an early release of Notice 2023-63 , designed to offer preliminary guidance aimed at clarifying the application of section 174, as modified by Pub. L. No. 115-97, often referred to as the “Tax Cuts and Jobs Act” (TCJA).   This notice encompasses guidance on the following matters: 1. Capitalization and amortization of specified research or experimental (SRE) expenditures under section 174, as amended. 2. Treatment of SRE expenditures under section 460. 3. Application of section 482 to cost-sharing arrangements involving SRE expenditures. Furthermore, it should be noted that the Treasury Department and the IRS have expressed their intention to issue proposed regulations, aligning with the guidance outlined in this notice, for tax years concluding after September 8, 2023.   Until these regulations are finalized, taxpayers are permitted to rely on the interim guidance in this notice, provided they consistently apply all of the rules. However, it’s important to emphasize that taxpayers cannot apply the rules in section 7 of the notice to SRE expenditures related to property contributed to, distributed from, or transferred from a partnership.   Additionally, this notice announces the forthcoming issuance of guidance by the Treasury Department and IRS that will outline procedures for taxpayers to secure automatic consent for changing accounting methods to comply with the notice. In the interim, taxpayers can rely on section 7.02 of Rev. Proc. 2023-24 to adjust their accounting methods under section 174 to align with the notice’s provisions.   The Treasury Department and IRS anticipate releasing updated procedures addressing situations in which taxpayers had previously altered their accounting methods to comply with the TCJA-amended section 174 but did not fully align with the notice. It’s important to clarify that the guidance provided in this notice does not apply to the determination of whether an expenditure incurred for taxable years starting before January 1, 2022, qualifies as a research or experimental expenditure under section 174, as it existed prior to January 1, 2022.   Furthermore, the notice offers guidance on expenditures treated as SRE expenditures under section 174, affecting expenses potentially classified as SRE expenditures for section 41(d)(1)(A) and Treas. Reg. § 1.41-4(a)(2)(i) purposes. Nevertheless, the notice does not intend to alter the existing rules for determining eligibility for or the calculation of the research credit under section 41, including the provisions related to “research with respect to computer software,” “qualified research,” and “qualified research expenses.”  

ce Today, the IRS has unveiled an early release of Notice 2023-63 , designed to offer preliminary guidance aimed at clarifying the application of section 174, as modified by Pub. L. No. 115-97, often referred to as the “Tax Cuts and Jobs Act” (TCJA).

  This notice encompasses guidance on the following matters: 1. Capitalization and amortization of specified research or experimental (SRE) expenditures under section 174, as amended. 2. Treatment of SRE expenditures under section 460. 3. Application of section 482 to cost-sharing arrangements involving SRE expenditures. Furthermore, it should be noted that the Treasury Department and the IRS have expressed their intention to issue proposed regulations, aligning with the guidance outlined in this notice, for tax years concluding after September 8, 2023.   Until these regulations are finalized, taxpayers are permitted to rely on the interim guidance in this notice, provided they consistently apply all of the rules. However, it’s important to emphasize that taxpayers cannot apply the rules in section 7 of the notice to SRE expenditures related to property contributed to, distributed from, or transferred from a partnership.   Additionally, this notice announces the forthcoming issuance of guidance by the Treasury Department and IRS that will outline procedures for taxpayers to secure automatic consent for changing accounting methods to comply with the notice. In the interim, taxpayers can rely on section 7.02 of Rev. Proc. 2023-24 to adjust their accounting methods under section 174 to align with the notice’s provisions.   The Treasury Department and IRS anticipate releasing updated procedures addressing situations in which taxpayers had previously altered their accounting methods to comply with the TCJA-amended section 174 but did not fully align with the notice. It’s important to clarify that the guidance provided in this notice does not apply to the determination of whether an expenditure incurred for taxable years starting before January 1, 2022, qualifies as a research or experimental expenditure under section 174, as it existed prior to January 1, 2022.   Furthermore, the notice offers guidance on expenditures treated as SRE expenditures under section 174, affecting expenses potentially classified as SRE expenditures for section 41(d)(1)(A) and Treas. Reg. § 1.41-4(a)(2)(i) purposes. Nevertheless, the notice does not intend to alter the existing rules for determining eligibility for or the calculation of the research credit under section 41, including the provisions related to “research with respect to computer software,” “qualified research,” and “qualified research expenses.”  

2023-63 , designed to offer preliminary guidance aimed at clarifying the application of section 174, as modified by Pub. L. No. 115-97, often referred to as the “Tax Cuts and Jobs Act” (TCJA).

  This notice encompasses guidance on the following matters: 1. Capitalization and amortization of specified research or experimental (SRE) expenditures under section 174, as amended. 2. Treatment of SRE expenditures under section 460. 3. Application of section 482 to cost-sharing arrangements involving SRE expenditures. Furthermore, it should be noted that the Treasury Department and the IRS have expressed their intention to issue proposed regulations, aligning with the guidance outlined in this notice, for tax years concluding after September 8, 2023.   Until these regulations are finalized, taxpayers are permitted to rely on the interim guidance in this notice, provided they consistently apply all of the rules. However, it’s important to emphasize that taxpayers cannot apply the rules in section 7 of the notice to SRE expenditures related to property contributed to, distributed from, or transferred from a partnership.   Additionally, this notice announces the forthcoming issuance of guidance by the Treasury Department and IRS that will outline procedures for taxpayers to secure automatic consent for changing accounting methods to comply with the notice. In the interim, taxpayers can rely on section 7.02 of Rev. Proc. 2023-24 to adjust their accounting methods under section 174 to align with the notice’s provisions.   The Treasury Department and IRS anticipate releasing updated procedures addressing situations in which taxpayers had previously altered their accounting methods to comply with the TCJA-amended section 174 but did not fully align with the notice. It’s important to clarify that the guidance provided in this notice does not apply to the determination of whether an expenditure incurred for taxable years starting before January 1, 2022, qualifies as a research or experimental expenditure under section 174, as it existed prior to January 1, 2022.  

Furthermore, the notice offers guidance on expenditures treated as SRE expenditures under section 174, affecting expenses potentially classified as SRE expenditures for section 41(d)(1)(A) and Treas. Reg. § 1.41-4(a)(2)(i) purposes. Nevertheless, the notice does not intend to alter the existing rules for determining eligibility for or the calculation of the research credit under section 41, including the provisions related to “research with respect to computer software,” “qualified research,” and “qualified research expenses.”