Under revised IRC Section 174, R&E expenses incurred in tax years beginning after December 31, 2021 must be capitalized and amortized over 5 years (or 15 years if the research is performed outside of the United States). A taxpayer’s change in treatment of R&E expenses is a change in method of accounting requiring the Commissioner’s consent. However, Rev. Proc. 2023-8 provides automatic consent for the change and a streamlined procedure if the accounting method change is made for the first effective year. Taxpayers making a change for the tax year following the first effective year will not be entitled to the streamlined procedure and an audit protection is not provided.
Taxpayers making the change in the first effective tax year must use cut-off method to apply the new method and provide statement providing required information per the Rev. Proc. 2023-8, including:
(A) the name and employer identification number or social security number, as applicable, of the applicant that has paid or incurred specified research or experimental expenditures after December 31, 2021;
(B) the beginning and ending dates of the first taxable year in which the change to the required § 174 method takes effect for the applicant (year of change);
(C) the designated automatic accounting method change number for this change (DCN 265);
(D) a description of the type of expenditures included as specified research or experimental expenditures;
(E) the amount of specified research or experimental expenditures paid or incurred by the applicant during the year of change; and
(F) a declaration that the applicant is changing the method of accounting for specified research or experimental expenditures to capitalize such expenditures to a specified research or experimental capital account, and amortize such amount over either a 5-year period for domestic research or 15-year period for foreign research (as applicable) beginning with the mid-point of the taxable year in which such expenditures are paid or incurred in accordance with the method permitted under § 174 for the year of change. Also, the declaration must state that the applicant is making the change on a cut-off basis.