While it will hurt for taxpayers to lose current deductions for research costs, the IRS has at least minimized the administrative pain involved.
Taxpayers have to start capitalizing and amortizing research expenses in 2022 to comply with tax changes enacted in 2017. Under prior law, such expenses could be deducted as incurred. The IRS today gave taxpayers instructions for implementing this change.
The guidance, provided in Rev. Proc. 2023-08, directs taxpayers to employ a "cut-off" method to start capitalizing post-2021 research costs. Taxpayers generally are to report the change in accounting method with a statement attached to their 2022 returns. This will spare taxpayers the time and expense of using the more formal accounting method change request procedures of Form 3115.
Andrea Mouw, Partner in Charge of Accounting Methods for the Eide Bailly National Tax Office, welcomes the guidance:
Rev. Proc. 2023-8 provides very practical, simplified rules for taxpayers to adopt the required change in treatment of R&D costs under Section 174. Allowing taxpayers to make the change with a white paper statement rather than a Form 3115 under most circumstances will reduce the burden on taxpayers and preparers associated with complying with the filing requirements for the Form 3115.
Some taxpayers may have already filed returns for short tax years beginning in 2022. Such taxpayers will be deemed in compliance if they capitalized and amortized their post-2021 research expenses. Otherwise, taxpayers who fail to properly capitalize post 2021 research expenses for their first post-2021 tax year will have to file a Form 3115 under "automatic" accounting method change procedures.