On Dec. 29, 2022 the IRS issued Rev. Proc, 2023-11 as an update to Rev. Proc 2023-08, which was released earlier in the month and simplified the procedure for implementing an accounting method change in Section 174 of the Tax Cuts and Jobs Act. The most recent update supersedes 2023-08 but leaves general procedures for implementing new section 174 largely the same as those provided in the previous revenue procedure.
The most significant change with Rev. Proc. 2023-11 was the elimination of audit protection for taxpayers that wait until their 2023 tax year to implement the new capitalization rules.
Background on new section 174
The Tax Cuts and Jobs Act (TCJA) of 2017 amended Section 174 of the Internal Revenue Code to require capitalization of specified research and experimental (R&E) expenses (“new Section 174”).
Under new section 174, specified R&E expenses must be capitalized and amortized over a five or 15-year period (depending on where the research takes place), beginning in the midpoint of the year the expenses are paid or incurred.
Bottom line on Rev. Proc. 2023-11
Pursuant to Rev. Proc 2023-11, companies that implement new Section 174 rules in the year after the new rules apply (2023 for a calendar year taxpayer) will not be granted audit protection for prior year treatment of specified R&E expenditures. Under both revenue procedures, no matter when a taxpayer implements new Section 174, audit protection will not be granted for tax years prior to 2022.
In short, the new revenue procedure prevents late adopters from protecting any previous, improperly deducted specified R&E expenses.
Navigating complex tax changes
Preparing for frequent changes and updates to sections of the tax code is a daunting task for any business owner. More than the sheer volume of changes, the complexity of these updates is increasing.
Expertise and guidance from qualified tax professionals can go a long way in helping you navigate these changes and how it will apply for your business. Our dedicated team of tax specialists have been assisting clients with the new Section 174 rules since they were implemented.
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