The Internal Revenue Service and the Treasury Department released updated guidance on accounting method changes for research and development expenditures after a revenue-raising provision of the Tax Cuts and Jobs Act of 2017 took effect despite efforts by lobbyists to extend the tax break.
The IRS and the Treasury issued Revenue Procedure 2023-11 last week providing updated guidelines for accounting method changes for specified research or experimental expenditures. The new guidance supersedes Revenue Procedure 2023-8, which was recently issued just in December. Revenue Procedure 2023-11 aims to encourage timely compliance with changes made by the Tax Cuts and Jobs Act. The revenue procedure contains guidance similar to Rev. Proc. 2023-8 but modifies the audit protection with respect to Section 174 expenditures to encourage timely compliance with the changes made by the Tax Cuts and Jobs Act, which took effect for tax years beginning after Dec. 31. 2021.
The provision requires amortization of R&D expenses by companies over a five-year period rather than being able to immediately deduct them. The change actually took effect at the beginning of last year, but companies had held out hope the tax break would be extended again by Congress. Republicans had been in favor of extending the R&D expensing tax break, in addition to extending 100% bonus depreciation for new asset purchases and delaying the cap on deductibility of interest expenses from the 2017 tax law. Democrats, on the other hand, had pushed for extending the expanded Child Tax Credit from the American Rescue Plan Act of 2021. The two parties were unable to agree on a deal to include those tax provisions in the year-end omnibus spending bill that Congress passed a few days before Christmas (see story). That means the R&D expense changes from the 2017 tax law are now operable and hence the need for update guidance. Revenue Procedure 2023-11 will appear in Internal Revenue Bulletin 2023-3, dated Jan. 17, 2023.