On December 22, 2023, the IRS released Rev. Proc. 2024-09 containing new and revised procedural guidance concerning specified research and experimental (SRE) expenditures under IRC Section 174. We will release a more comprehensive analysis of the procedural guidance in the new year. In the interim, we have included a few key takeaways below.
The guidance creates a new DCN 270 for changes to comply with Notice 2023-63 (except for section 8 concerning the interaction with Section 460, discussed below). DCN 265 remains available for changes to comply with Section 174, generally.
In addition, the guidance clarifies that these DCNs include, among others, changes from capitalizing SRE expenditures to inventoriable property or depreciable property to capitalizing and amortizing them under Section 174/Notice 2023-63.
Under this revised guidance, taxpayers may file an accounting method change for their first and second taxable years beginning after December 31, 2021, even if that taxpayer filed an accounting method change for the same item in any of the prior five years. Under previous guidance, the five-year restriction was only waived for a taxpayer’s first taxable year beginning after December 31, 2021.
Rev. Proc 2024-09 creates a new automatic change (DCN 271) to allow taxpayers to conform to section 8 of Notice 2023-63, which concerns the treatment of SRE expenditures under the percentage of completion method. For changes made in year 2 or after, the guidance also allows for a Section 481(a) adjustment, which is somewhat surprising as nearly all other Section 460 accounting method changes are made on a cut-off basis.
In addition to allowing for the automatic change and the Section 481(a) adjustment, the guidance specifies that taxpayers may choose whether the denominator of their completion ratio contains all amortization allocable to the contract (in many cases the full amount of the SRE expenditure) or only that portion of the allocable amortization that is expected to be deductible during the term of the contract.
The IRS also released Notice 2024-12, which clarifies and modifies certain sections of Notice 2023-63 pertaining to the treatment of costs in a contract research arrangement and the ability of taxpayers to rely on the rules of Notice 2023-63 for taxable years beginning after December 31, 2021. Additional details regarding Notice 2024-12 will be provided in the forthcoming analysis to be released in the new year.