IRS Set to Release R&D Amortization Regulations This Winter

The IRS is planning to release updated regulations for the tax treatment of research and development (R&D) costs this winter, providing much-needed clarity for companies navigating these complex rules.

What’s Coming: Proposed Section 174 Regulations

Scott Vance, associate chief counsel for income tax and accounting in the IRS Office of Chief Counsel, recently announced that the proposed rules under Section 174 are expected in “a matter of months and not a lot of months.” This update was shared during a virtual conference of the American Bar Association’s tax section.

The proposed regulations will build on the interim guidance issued last year, focusing on areas like:

• Software development
• Contractors’ deduction of costs
• Abandoned property
• Specified research and experimental expenses

The new regulations aim to be “more robust” in their treatment of these topics, addressing the challenges that have arisen since the 2017 tax overhaul.

What Does This Mean for Businesses?

Under the 2017 tax overhaul, companies are now required to amortize their R&D costs over five years instead of expensing them in the year they are incurred. This change has impacted cash flow for many businesses, as they can no longer take the full deduction upfront. This shift results in fewer R&D costs being deducted in any given year and, therefore, higher taxes in the short term.

While there has been pressure from companies and members of Congress to revert to the previous expensing method, Congress has not yet reached an agreement to do so.

More Procedural Guidance on the Way

The IRS is also considering issuing additional procedural guidance on how taxpayers should adjust their accounting methods to align with the R&D amortization rules. This would supplement the guidance already released and provide further clarity for those looking to stay compliant while minimizing tax impacts.

Other Planned IRS Guidance

Julie Hanlon-Bolton, deputy associate chief counsel for income tax and accounting in the Office of Chief Counsel, provided additional insights into upcoming guidance:

• Revenue Procedure Update: The IRS intends to update its revenue procedure on accounting method changes by June 2025 as part of its Priority Guidance Plan.
• Section 472 Regulations: The IRS is actively working on Section 472 regulations related to dollar-value last-in, first-out (LIFO) inventories, as well as final regulations for the inventory price index computation (IPIC) method. These LIFO regulations are reportedly “fairly far along,” and work on the IPIC regulations is also progressing.

Need Assistance? We’re Here to Help

Navigating R&D amortization and upcoming tax regulations can be complex, especially with changes on the horizon. At Tonneson + Co, our tax advisors are ready to provide guidance tailored to your business needs. Whether you need help adjusting your accounting methods, understanding how these new regulations might impact your tax strategy, or planning for future compliance, our team is here to assist.

Reach out to our advisors for further questions or support as the IRS releases these critical updates.