The IRS recently released a notice providing comprehensive guidelines on the treatment of Specified Research or Experimental (SRE) expenditures under Section 174 of the Internal Revenue Code. Contrary to some perceptions, IRS Notice 2023-63 doesn't introduce new legislation; rather, it provides clarity on existing tax regulations, particularly those affected by the 2017 Tax Cuts and Jobs Act.
- Expenses related to research must be capitalized and amortized over 5 years (domestic research) or 15 years (foreign research). This includes things like scientists’ salaries and lab supplies.
- Administrative costs and interest expenses are exempt from capitalization. Only direct research costs are impacted.
- Outlines categories of software development expenses and how they should be treated.
- The notice outlines how businesses should handle research done through contracts and partnerships.
- These guidelines apply to tax years starting January 1, 2022 or later.
Why It Matters
While this notice doesn't overhaul the R&D tax credit system, it does provides valuable clarification for companies engaged in research and development. We want to help you fully understand these changes so you can plan accordingly.
The team at ETS offers specialized consultations, R&D tax credit analyses and compliance guidance to help you navigate these intricate waters. Ready for a deep dive? Contact us today to gain valuable insight on maximizing R&D credits for your specific tax situation.