A new IRS Notice and Rev. Proc. allows taxpayers to correct errors made in 2022 in the 2023 tax year, avoiding messy amending issues.

By Jamie Overberg

The U.S. Treasury Department and IRS have jointly updated method change procedures (Rev. Proc. 2023-24) to enable taxpayers to rely on IRS Section 174 interim guidance outlined in Notice 2023-63, as modified by Notice 2024-12. Notice 2024-12, along with related Rev. Proc. 2024-9, specifies conditions under which taxpayers can depend on Notice 2023-63, as modified.

The recent IRS guidance on the capitalization and amortization of specified research or experimental (SRE) expenditures provides taxpayers with final procedures for changing accounting methods. It defines audit protection conditions, clarifies the treatment of computer software, and sets effective dates for filing Form 3115.

Taxpayers who haven’t filed federal income tax returns for years beginning after Dec. 31, 2021, should work with their TaxOps Min Advisor to determine proper guidance to follow and timing for filing Form 3115. Those who have filed these tax returns may want to review their 2022 calculations to consider filing Form 3115 for a change in the accounting method for 2023, incorporating any new guidance herein.

Notice 2024-12 Highlights

Notice 2024-12 clarifies the treatment of SRE expenditures under Section 174. It modifies previous guidance (Notice 2023-63) and addresses proposed regulations related to capitalization and amortization under section 174, as amended by the Tax Cuts and Jobs Act. Taxpayers may rely on the new guidance for expenses paid or incurred in tax years beginning after December 21, 2021. The new notice does not apply to SRE paid or incurred for tax years beginning before 2022.

Notice 2024-12 further specifies SRE eligibility criteria for Contract Research (i.e., third-party research providers) by clarifying earlier guidance regarding the treatment of contractual costs paid or incurred by a research provider. Only research providers who are at “risk” in their role as third-party research provider are eligible for SRE expenses; “rights” are separately negotiated (see Funded Research: Follow the Money to R&D Credits for a discussion on rights and risks related to third party research providers).

Rev. Proc. 2024-9 Highlights

In short, Rev. Proc. 2024-9 updates accounting method change procedures and clarifies section 9 of Rev. Proc. 2023-24. The automatic consent procedures to change methods of accounting for specified research or experimental expenditures are addressed in sections 7 and 19 of Rev. Proc. 2023-24, 2023-28 I.R.B. 1207, and comply with guidance provided in Notice 2023-63, 2023-39 I.R.B. 919, as modified by Notice 2024-12.

Rev. Proc. 2024-9 also makes obsolete section 5 of Rev. Proc. 2000-50 for computer software development costs paid or incurred after December 31, 2021. Audit protection is extended for 2022 accounting changes. The procedure allows section 460 calculation changes and provides for the treatment of pre-2022 software development costs. The changes are effective for Forms 3115 filed on or after December 22, 2023.

The Takeaway

Adoption of the new capitalization during 2022 tax year was fraught with ambiguity and varying tax professional interpretations. With the new notice and Rev. Proc., taxpayers can analyze the components of the costs and make a more accurate determination. If errors were made in 2022, the Rev. Proc. allows for adoption of the correct capitalization in the 2023 tax year. This avoids messy amending issues.

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