Internal Revenue Service Issues Interim Guidance on Specified Research and Experimental Expenditures

The Internal Revenue Service (IRS) recently issued Notice 2023-63 to provide interim guidance on the amortization of specified research and experimental (SRE) expenditures under Internal Revenue Code (IRC) Section 174. The intention of the IRS is to issue proposed regulations consistent with the guidance in the notice.

The notice provides guidance regarding the treatment of SRE expenditures under IRC Section 460 as well as the application of Section 482 to cost-sharing arrangements that involve SRE expenditures. Examples of costs that are SRE expenditures paid or incurred in connection with the taxpayer’s business and software development activities are included in the guidance, along with expanded definitions. This notice is not intended to change the rules for determining eligibility for, or computation of, the research credit under Section 41 and the regulations thereunder, including rules for “research with respect to computer software,” and the definitions of “qualified research” and “qualified research expenses.” For taxpayers that have already filed or completed their Section 174 calculations before this notice, there will be the opportunity to change the tax accounting method in 2023 to conform to the guidance.

Although the current guidance is not currently applicable, the forthcoming proposed regulations would apply to tax years ending after September 8, 2023. Taxpayers may choose to rely on the interim guidance in this notice retroactively to tax years beginning after December 31, 2021.

We are in the process of preparing a detailed analysis of the Notice, which will be published shortly. Stay tuned for a more comprehensive analysis to this important development.

TECHNICAL INFORMATION CONTACTS:

Greg Rottjakob
Principal
Ryan
314.721.1300
greg.rottjakob@ryan.com

Violet Goodheart
Director
Ryan
972.934.0022
violet.goodheart@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.