IRS issues new guidance around specified research or experimental (“SRE”) expenditures (Section 174):
Notice 2024 – 12 clarifies and modifies the following 3 sections of Notice 2023-63:
- Contract Research Provider: Costs paid or incurred by a research provider for contract research services where the research provider does not bear financial risk and any rights acquired are separately bargained for or the use is only limited to the terms of the contract would not be considered a SRE under Section 174.
- Reliance on Notice 2023-63: Taxpayers are not required to rely on all of the rules, but rather may choose to rely on certain sections of the rules described in sections 3 through 9 of Notice 2023-63, provided the taxpayer relies on them in a consistent manner.
- Computer Software Research and Development: Rev. Proc. 2000-50 continues to apply to amounts paid or incurred in taxable years beginning on or before December 31, 2021 but is obsolete for amounts paid or incurred in taxable years beginning after December 31, 2021.
Rev. Proc. 2024-9 provides updated procedures for automatic consent to change methods of accounting for taxable years beginning after December 31, 2021:
- Section 174 (SRE): Provides procedures to rely on the interim guidance provided in Notice 2023-63 for tax years beginning on or after December 31, 2021. The five-year same item eligibility rule was waived for the first and second tax year beginning after December 31, 2021.
- Rev. Proc. 2000-50 (Computer Software R&D): Provides that changes under section 9 of Rev. Proc. 2023-24 does not apply to costs of developing computer software paid or incurred in taxable years beginning after December 31, 2021.
- Section 460 (Percentage-of-Completion Method): Taxpayers are allowed to use one of the following two methods for estimating total allocable contract costs:
- All amortization of SRE expenditures that directly benefit or are incurred by reason of the performance of the long-term contract, or
- Only that portion of suction amortization expected to be incurred and deducted during the term of the contract. A taxpayer using this alternative is required to report any portion of the contract price not previously reported by the taxable year following the taxable year in which the contract is completed.
The five-year same item eligibility rule was waived for the first and second tax year beginning after December 31, 2021.
Paige Riordon CPA, Principal, R&D Tax Credit Leader
Paige serves as BRC’s Research Credit Leader out of the Greensboro, NC office. Paige has almost 20 years of experience assisting clients with Research Credits across a variety of industries, including consumer products, life sciences, manufacturing, pharma, software, and technology. Paige uses her experiences to customize studies to fit each client’s unique needs while […]
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