Not so timely IRS guidance on Section 174 and most notably treatment of research expenditures under Section 460

On Friday, September 8th, one week before many taxpayers extended filings deadline, the IRS issued Notice 2023-63. This notice provides guidance around Sec. 174, and more notably, on the treatment of research expenditures allocable to long-term contracts under Sec. 460. It is expected that the IRS will issue proposed regulations, consistent with the notice, that will apply to tax years ending after September 8, 2023 (calendar year 2023). The IRS is also allowing taxpayers the option to apply the guidance to 2022 tax years provided taxpayers apply the provisions of the Notice in its entirety.  However, with the release so close to the 9/15 filing deadline, most taxpayers will apply the guidance starting in the 2023 tax year.

The proposed regulations would amend existing Sec. 460 regulations, to provide that costs allocable to a long-term contract accounted for using the percentage-of-completion method include amortization of the research costs in the numerator, and that amortization is treated as incurred for purposes of determining the percent complete.

Keep in mind that The Build It in America Act proposed to reinstate the deductibility of 174 expenditures on a retroactive basis to the beginning of 2022. While the attention of Congress is currently focused on the September 30 budget deadline, discussions around Sec. 174 may continue around year-end as part of a tax package.