IRS issues guidance for method change to capitalize R&D expenses

IRS issues advance release requiring method change due to looming changes on the horizon for R&D expenses.

Taxpayers have been hoping Congress will delay or revise the new Section 174 requirements to begin capitalizing and amortizing all research or experimental (R&E) expenditures starting with their 2022 tax return. Assuming Congress is unable to accomplish this task before the current session ends, the IRS released procedures to obtain automatic consent to change methods of accounting for amortizing R&E expenditures.

Generally, taxpayers have elected to immediately deduct R&D expenses under the prior rules before the 2017 Tax Cuts and Jobs Act (TCJA). Starting in 2022 current R&D expenses must be capitalized and amortized ratably over a minimum of five years.  The application of this amended rule is treated as a change in the taxpayer’s method of accounting on a cutoff basis for R&E expenses paid after 2021, therefore no corresponding Section 481(a) adjustment will be needed.

A copy of Revenue Procedure 2023-11 can be accessed on the IRS website.

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