In late December 2023, the IRS released Notice 2024-12 and Revenue Procedure 2024-09, clarifying several key points with regard to Section 174 Capitalization and Amortization for years following December 31, 2021.
Notice 2024-12 provides additional detail to the interim guidance released September 2023 in Notice 2023-63 relating to the definitions and treatment of funded research. The interim guidance could have been interpreted to require taxpayers to capitalize Specified Research Expenditures (SREs) when the taxpayer had EITHER the Intellectual Property OR Financial Risk for the business component.
Notice 2024-12, in Section 2.04, clarifies that the taxpayer must have BOTH Intellectual Property AND Financial Risk for the business component for the expenditures to qualify as SREs. This distinction is critical for clients claiming the Research and Experimentation Tax Credit under Section 41 (often referred to as the R&D Credit), as the interim guidance created the potential for an SRE footprint much larger than a company’s eligible Qualified Research Expenditures (QREs). The December notice additionally modifies 2023-63 by waiving the requirement for any taxpayer to rely on all portions of the September notice and allows reliance on both 2023-63 and 2024-12.
Key Procedures from Revenue Procedure 2024-09
On the same day, the IRS also released Revenue Procedure 2024-09, which provides several key procedures:
- Taxpayers that change their method of accounting for SRE expenditures under Rev. Proc. 2023-24 receive limited audit protection for those SREs, consistent with the limited audit protection under Rev. Proc. 2023-63.
- A taxpayer that changes its methodology to rely on the interim guidance under Rev. Proc. 2023-63 is allowed to obtain automatic consent for the change, without having to file Form 3115 to apply for an accounting method change.
- If a taxpayer did not change the accounting method to comply with Section 174 for the first tax year after December 31, 2021, the change is made by filing Form 3115 and including a modified Section 481(a) adjustment that takes into account SREs for the appropriate prior years.
Aligning Section 174 Capitalization and Section 41 Research Tax Credit Rules
In summary, the definitions for Section 174 SREs have been brought more clearly in line to Section 41 QREs for funded research, and taxpayers and tax professionals now have a mechanism for aligning the Section 174 Capitalization and Amortization amounts to the guidance released by the IRS in September and December 2023.
Contact us to learn more about these changes and to optimize your R&D credit planning.
