Guidance released under Notice 2023-63 focuses on the amortization of specified research or experimental expenditures under §174, and announces more regulations on the horizon. What does it mean for taxpayers? Read on for effective dates, rules, and what’s to come.

The U.S. Treasury and IRS released guidance under Notice 2023-63 on the amortization of specified research or experimental expenditures under §174. The primary aim of this notice is to announce that proposed regulations are coming to address modifications to the treatment of §174, particularly in relation to R&D expenses.  

The tax treatment under §174 changed due to the Tax Cuts and Jobs Act of 2017, affecting expenses incurred beginning with the 2022 tax year. It is important to note that this notice is in the initial stages of proposed regulations and will evolve into final regulations at a later date.  

Below are some notable items that we have gathered from this notice:  

1. Under section 10 of the guidance, this notice would apply for taxable years ending after September 8, 2023. A taxpayer may, nevertheless, choose to rely on the rules described in section 3 through 9 of this notice for the 2022 tax year.

2. It is notable that the guidance requires taxpayers to include §174 related depreciation and amortization as part of their capitalization amount. Costs of the HR and personnel departments, such as recruiting R&D professionals, are considered indirect and do not require capitalization. Treasury has also provided some clear contractor/research provider guidance that had not been previously available.

3. Should this guidance become finalized regulations, some taxpayers may have an increased amount of capitalized costs versus what they can deduct for the tax year 2023 compared to 2022 amounts.

4. Section 11 specifically asks for comments regarding scope, software development, research performed under contract and other specific issues that the Treasury and IRS have yet to address.

Key Takeaways

  • As 2023 guidance progresses and more specific details on standardized treatment becomes available, adjustments to your §174 approach and determination may become necessary.
  • As a member of the AICPA working group dedicated to these tax matters, Mark is participating with a subcommittee to assess and comment further on this guidance.

Although stalled out, there is still the possibility that the U.S. Congress will step in and repeal or modify the law in ways that would allow taxpayers to choose once again to deduct immediately or capitalize and amortize §174 costs over a period of time. We’ll keep you updated on any developments.

Contact your TaxOps Minimization Advisor with any questions.

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