IRS Provides Automatic Consent Procedures for Research Expenditures After 2021

(Parker Tax Publishing January 2025)

The IRS modified the procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for obtaining automatic consent to change methods of accounting for research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021. The procedure expands the waiver of the eligibility rules in Rev. Proc. 2015-13 to accounting method changes described in Section 7.01 of Rev. Proc. 2024-23 that are made for any tax year beginning in 2022, 2023, or 2024. Rev. Proc. 2025-8.

Background

Before January 1, 2022, Code Sec. 174 allowed taxpayers to deduct research or experimental expenditures paid or incurred in connection with a trade or business as current expenses, or alternatively, charge such expenditures to a capital account and amortize them ratably over a period of not less than 60 months.

The Tax Cuts and Jobs Act (TCJA) (Pub. L. 115-97) amended Code Sec. 174. For amounts paid or incurred in tax years beginning after December 31, 2021, that meet the definition of specified research or experimental (SRE) expenditures under Code Sec. 174(b), Code Sec. 174(a)(1) disallows deductions for such amounts, except as provided in Code Sec. 174(a)(2). Code Sec. 174(a)(2) requires taxpayers to charge SRE expenditures to capital account and allows amortization deductions of such capitalized expenditures ratably over a 5-year period in the case of SRE expenditures attributable to domestic research, or a 15-year period in the case of SRE expenditures attributable to foreign research, beginning with the midpoint of the tax year in which such expenditures are paid or incurred.

The TCJA requires the amendments to Code Sec. 174 to be treated as a change in method of accounting for purposes of Code Sec. 481 that is (1) initiated by the taxpayer, (2) made with the IRS's consent, and (3) applied on a cut-off basis to SRE expenditures paid or incurred in tax years beginning after December 31, 2021.

Under Code Sec. 446(e) and Reg. Sec. 1.446-1(e)(2), taxpayers are generally must file Form 3115, Application for Change in Accounting Method, to secure IRS consent before changing a method of accounting. The procedures for taxpayers to obtain automatic consent are provided in Rev. Proc. 2015-13, as modified by later procedures. Rev. Proc. 2024-23 contains the current List of Automatic Changes. In Rev. Proc. 2023-11, the IRS provided procedures to obtain automatic consent to change methods of accounting for SRE expenditures to comply with Code Sec. 174, as amended by the TCJA. The change in method of accounting provided by Rev. Proc. 2023-11 was subsequently included in Section 7.02 of Rev. Proc. 2023-24.

In Notice 2023-63, the IRS announced that it will issue proposed regulations addressing (1) the capitalization and amortization of SRE expenditures under Code Sec. 174, (2) the treatment of SRE expenditures under Code Sec. 460, and (3) the application of Code Sec. 482 to cost sharing arrangements involving SRE expenditures. Sections 3 through 9 of Notice 2023-63 provide interim guidance regarding issues intended to be addressed in the forthcoming proposed regulations. Notice 2024-12 was issued on December 22, 2023, to provide additional interim guidance to clarify and modify Notice 2023-63.

In Rev. Proc. 2024-9, the IRS provided automatic consent procedures for taxpayers to change methods of accounting for expenditures paid or incurred in tax years beginning after December 31, 2021, to comply with Code Sec. 174 and the interim guidance provided in Notice 2023-63, as modified by Notice 2024-12. The change in method of accounting for Code Sec. 174 provided in Section 3 of Rev. Proc. 2024-9 modified Section 7.02 of Rev. Proc. 2023-24. Rev. Proc. 2023-24 was subsequently superseded in part by Rev. Proc. 2024-23. Rev. Proc. 2024-23 renumbered Section 7.02 as Section 7.01 and removed former Section 7.01 as obsolete.

Rev. Proc. 2025-8

A change in a taxpayer's treatment of expenditures paid or incurred in tax years beginning after December 31, 2021, to comply with Code Sec. 174 or to rely on the interim guidance in Sections 3 through 7 of Notice 2023-63 is generally a change in method of accounting to which Code Secs. 446(e) and 481, and the corresponding regulations, apply. A taxpayer that changes its method of accounting to comply with Code Sec. 174 or to rely on the interim guidance in Sections 3 through 7 of Notice 2023-63 must use the accounting method change procedures in Rev. Proc. 2015-13 or its successor.

In Section 3 of Rev. Proc. 2025-8, the IRS modifies the eligibility rules in Section 7.01 of Rev. Proc. 2024-23 to allow taxpayers to obtain automatic consent to change their method of accounting to comply with Code Sec. 174 or to rely on the interim guidance provided in Sections 3 through 7 of Notice 2023-63 for tax years beginning after December 31, 2021.

Specifically, the IRS is aware that taxpayers may not be eligible to file automatic changes in methods of accounting under Section 7.01 of Rev. Proc. 2024-23 for a tax year beginning in 2024. This is because the waiver of the eligibility rules in Rev. Proc. 2015-13 applies only to a change described in Section 7.01(1)(a) of Rev. Proc. 2024-23 made by a taxpayer for any tax year beginning in 2022 or 2023. Therefore, the procedures in Section 3 of Rev. Proc. 2025-8 modify the eligibility rules in Section 7.01(5)(a) of Rev. Proc. 2024-23 to provide that the eligibility rules in Rev. Proc. 2015-13 do not apply to a change described in Section 7.01(1)(a) of Rev. Proc. 2024-23 made by a taxpayer for any tax year beginning in 2022, 2023, or 2024.

The procedures in Section 3 of Rev. Proc. 2025-8 also modify the rules for changes made in successive tax years in Section 7.01(5)(b) of Rev. Proc. 2024-23 to provide that a taxpayer may make a change described in Section 7.01(1)(a) of Rev. Proc. 2024-23 for a tax year beginning in 2022, 2023, or 2024, regardless of whether the taxpayer made a change for the same item for any previous tax year beginning in 2022, 2023, or 2024.

Rev. Proc. 2025-8 is effective for Forms 3115, Application for Change in Accounting Method, filed on or after December 17, 2024. If, before that date, a taxpayer properly filed a Form 3115 requesting consent for a change in method of accounting described in Section 7.01(1)(a) of Rev. Proc. 2024-23, and the Form 3115 is pending with the national office, the taxpayer may choose to make the change in method of accounting under the automatic change procedures in Rev. Proc. 2015-13 if the taxpayer is now eligible to use the automatic accounting method change described in Section 7.01(1)(a) of Rev. Proc. 2024-23 as a result of the modifications made by Rev. Proc. 2025-8 (and is otherwise eligible to use Section 7.01(1)(a) of Rev. Proc. 2024-23 and the automatic change procedures in Rev. Proc. 2015-13). The taxpayer must notify the national office contact person for the Form 3115 of the taxpayer's intent to make the change in method of accounting under the automatic change procedures in Rev. Proc. 2015-13 before the later of (1) January 17, 2025, or (2) the issuance of a letter ruling granting or denying consent for the change.

For a discussion of amortization of research and experimental expenditures after 2021, see Parker Tax ¶95,540. For a discussion of changes in methods of accounting, see Parker Tax ¶241,590.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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