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IRS research guidance simplifies rules but has potential traps

January 4, 2023 / 5 min read

While Rev. Proc. 2023-8 provides welcome guidance that will simplify adoption of new Section 174 research expense rules for many, there are some pitfalls that taxpayers should avoid. In Bloomberg Tax, Emily Murphy and Kurt Piwko discuss.

Beginning in 2022, the Tax Cuts and Jobs Act (TCJA) requires amortization of Section 174 research or experimentation (R&E) expenditures over five years for domestic R&E and 15 years for foreign R&E. This is a change from past practice, and the TCJA requires this to be treated as a change in method of accounting.

In the years since enactment, taxpayers have anxiously awaited further guidance from the IRS about how to file this accounting method change. That guidance finally arrived on December 12 with Rev. Proc. 2023-8.

New procedural guidance

Under the new procedure, adopting new Section 174 rules is done with an automatic accounting method change. Accounting method changes are typically accomplished through filing a Form 3115. However, the IRS is allowing taxpayers to implement this change by attaching a statement to their timely filed tax return for the first year in which R&E amortization is effective, instead of filing a Form 3115.

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