IRS Releases Additional Guidance for Sec 174 Amortization Rules

The IRS released Notice 2024-12 (released December 22, 2023) to clarify a previous notice and provide guidance on the Amortization of Specified Research or Experimental Expenditures under Section 174. Simultaneously, the IRS released Revenue Procedure 2024-9, providing modified and new procedures for changing accounting methods for the capitalization and amortization of research or experimental expenses (SRE expenses), including SRE expenses allocable to section 460 long-term contracts.

The previous notice, Notice 2023-63, was released in late 2023 and provided proposed, interim guidance under the new section 174 rules that require capitalization and amortization of SRE expenses.

Notice 2024-12

  • Removes the requirement that a taxpayer must apply all of the proposed rules in Notice 2023-63 in order to rely on any of the rules in the notice. This means taxpayers may now choose to rely on only the proposed rules (in Notice 2023-63, as modified by Notice 2024-12) that benefit it;
  • Clarifies the proposed rules to determine whether a research provider under a research contract has SRE expenses, by providing that if the research provider does not bear financial risk under the contract but obtains a right to exploit or otherwise use the resulting SRE product, the research provider does not have to treat its research service costs as SRE expenses as long as the obtained right qualifies as an “excluded SRE product right.” Notice 2024-12 provides that an excluded SRE product right is a right that is separately bargained for and that arises from consideration other than the cost paid or incurred by the research provider to perform the SRE activities under the research contract.
  • Clarifies that rules allowing for current deduction of software development costs, as provided in Rev. Proc. 2000-50, are obsolete for costs paid or incurred in tax years beginning after Dec. 31, 2021, but remain in effect for costs paid or incurred in earlier periods.

Revenue Procedure 2024-9

  • Section 3 modifies the previous Revenue Procedure 2023-24 to allow taxpayers to obtain automatic consent to change their method of accounting and rely on interim guidance under Sections 3 through 8 of Notice 2023-63;
  • Clarifies Section 9.01(1) and (3) of Revenue Procedure 2023-24, making it consistent with Section 12 of Notice 2023-63. This provides alternative methods of accounting for software development costs.
  • Provides a new, automatic method change for SREs allocable to long-term contracts accounted for under the percentage of completion method (PCM). The change also allows taxpayers to choose to include either the entire amount of allocable SRE expenses in the denominator of the completion factor or only the portion that will be amortized during the contract term.

Overall, this clarification and guidance is generally good news for taxpayers. The ability to select which, if any, provisions of Notice 2023-63, as modified by Notice 2024-12, to apply is particularly advantageous.

Additionally, the IRS and Treasury still plan to issue proposed regulations providing more substantive guidance under section 174. It is anticipated that these regulations will be issued sometime in late Spring and may impact taxpayers’ treatment of SRE expenses further.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

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