With the uncertain fate of the Tax Relief for American Families and Workers Act of 2024, taxpayers should consider that anticipated changes may not come to fruition. Outlined below are actions to consider if the bill doesn’t become law.
If passed, the bill would delay the required amortization of domestic research and experimental (R&E) expenditures implemented by the Tax Cuts and Jobs Act.
Bill Background
The House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 with an overwhelming bipartisan vote of 357 to 70 on January 31, 2024. The Senate has yet to vote on the bill as many lawmakers express concerns with specific provisions.
The proposed bill contains a provision delaying the required amortization of domestic R&E expenditures under Internal Revenue Code (IRC) Section 174 implemented by the Tax Cuts and Jobs Act until 2026 tax years. The proposed bill doesn’t include any provisions to delay the required amortization of foreign R&E expenditures under Section 174.
While the fate of the bill remains uncertain, prolonged inaction by the Senate isn’t promising for taxpayers.
How to Prepare Your Business
Here are the key actions taxpayers should consider taking:
- Assess for any applicable Section 174 R&E expenditures
- Review 2022 tax return
- Consider Section 9100 relief for missing statements
- Determine the need to file Form 3115 for 2023
- Consider R&D Tax Credits
Assess for any Applicable Section 174 Expenditures
The Treasury Department and IRS issued Notice 2023-63 and Notice 2024-12 providing guidance clarifying specified research or experimental (SRE) activities and expenditures under Section 174.
SRE activities include:
- Software development activities
- Activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product
SRE expenditures generally include all costs incident to the development or improvement of a product and all costs for software development, such as:
- Labor costs, including all elements of compensation other than severance (regular, overtime, vacation, holiday, sick, stock-based comp, payroll taxes, pension costs, employee benefits, and payments to a supplemental unemployment benefit plan)
- Materials, supplies, tools, and equipment that aren’t depreciable
- Depreciation, amortization, or depletion allowances for property used in research
- Patent cost, such as attorney fees in making and perfecting a patent application
- Travel costs
- Operation and management costs for rent, utilities, insurance, taxes, repairs and maintenance costs, security costs, and similar overhead costs with respect to facilities, equipment and other assets used in SRE activities
The IRS noted they’re on track to release proposed regulations in the summer. Once issued, the public will have a chance to make comments.
Review 2022 Tax Return
The IRS issued Rev. Proc. 2023-11, Rev. Proc. 2024-09, and Rev. Proc. 2024-23 enabling a taxpayer to file a statement in lieu of Form 3115, Application for Change in Accounting Method, with its original tax return for the first taxable year beginning after December 31, 2021, that the Section 174 amortization requirement is effective.
If applicable, the taxpayer needs to confirm if they appropriately started capitalizing and amortizing such costs for the 2022 tax year and confirm if they attached the appropriate statement to effectuate the change of accounting method to the original 2022 tax return.
Even if a taxpayer doesn’t have Section 174 R&E expenditures to capitalize and amortize for the 2022 tax year, the statement in lieu of Form 3115 may still be applicable to change a Section 174 method established in a previous year. This is also applicable to any taxpayers that have yet to file their timely, original tax return, such as certain fiscal year taxpayers.
Consider Section 9100 Relief for Missing Statements
If a taxpayer failed to attach the required statement in lieu of Form 3115 on its 2022 tax year to change its Section 174 method of accounting but did in fact begin capitalizing and amortizing such Section 174 R&E expenditures in tax year 2022, then a taxpayer might consider requesting Section 9100 relief to rectify the failed attempt.
Determine Need to File Form 3115 for 2023 Tax Year
Depending on how a taxpayer treated potential Section 174 R&E expenditures on its 2022 tax return, the taxpayer may be required to file a Form 3115 with its 2023 tax return.
For example, a taxpayer may need to file Form 3115 to change its method of accounting to rely on the interim guidance provided by Notice 2023-63. Such a change may require a modified Section 481(a) adjustment considering only SRE expenditures paid or incurred after December 31, 2021.
Consider R&D Tax Credits
The Section 174 R&E amortization is required regardless of whether a taxpayer claims the R&D tax credit. However, companies that have Section 174 R&E expenditures have a high likelihood of being eligible for the R&D tax credit, which can help mitigate the potentially negatives effects of Section 174 amortization.
We’re Here to Help
For guidance in understanding the impact of the Section 174 R&D amortization or R&D tax credits on your organization, contact your Moss Adams professional.