The Tax Cuts and Jobs Act (“TCJA”) of 2017 amended Section 174 to require taxpayers to capitalize and amortize specified research and experimental (“R&E”) expenditures over a period of five years for domestic expenses and 15 years for foreign expenses. Prior to the amendment of § 174, taxpayers could immediately deduct R&E expenditures that were paid or incurred by the taxpayer during the taxable year. These changes take effect in the first tax year after December 31, 2021, beginning with the midpoint of the taxable year in which the expenses are paid or incurred.
In response to the TCJA, the Treasury Department and IRS issued Revenue Procedure 2023-11 to provide updated guidelines for accounting method changes of those identified R&E expenditures that fall under § 174. In order to change the accounting method utilized, a taxpayer generally must file an application via Form 3115, Application for Change in Accounting Method. However, during the first taxable year beginning after December 31, 2021, a taxpayer may submit a statement in lieu of Form 3115. The statement must include the following information for each taxpayer:
- The name and employer identification number or social security number, as applicable;
- The beginning and ending dates of the year in which the change to the required § 174 method takes effect;
- The designated automatic accounting method change number for this change (#265);
- A description of the type of expenditures included as specified R&E expenditures;
- The amount of specified R&E expenditures paid or incurred by the applicant during the year of change; and,
- A declaration that the applicant is changing the method of accounting for specified R&E expenditures to capitalize such expenditures to a specified research or experimental capital account, and amortize such amount over either a five-year period (domestic research) or 15-year period (foreign research). The declaration must also state that the taxpayer is making the change on a cut-off basis.
In the year after the first taxable year beginning after December 31, 2021, the taxpayer must complete and file Form 3115 along with an attached statement, which includes the following:
- A description of the type of expenditures included as specified R&E expenditures;
- The taxable year(s) in which the specified R&E expenditures subject to the change were paid or incurred; and,
- A declaration that the applicant is changing the method of accounting for specified R&E expenditures to capitalize such expenditures to a specified research or experimental capital account, and amortize such amount over either a five-year period for domestic research or 15-year period for foreign research. The declaration must state that the taxpayer is making the change with a modified § 481(a) adjustment.
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Given the complexities of the § 174 amendments, it is important to speak with a tax advisor about the optimal method to identify qualified R&E expenditures as well as applying the method of accounting changes. While the process may be complex, Bennett Thrasher has a dedicated team of advisors to assist you with identifying the qualified R&E expenditures, as defined in § 174. If you have any questions, please reach out to Betsi Barrett or Nina Desai by calling 770-396-2200.
