SECTION 7. RESEARCH AND

EXPERIMENTAL EXPENDITURES (§ 174)

.01 Changes to a different method or different amortization period .

(1) Description of change . (a) This change applies to a taxpayer that wants to change the treatment of expenditures that qualify as research and experimental expenditures under § 174.

(b) Section 174 and the regulations thereunder provide the specific rules for changing a method of accounting under § 174 for research and experimental expenditures. Under § 174, a taxpayer may treat research and experimental expenditures that are paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business as expenses under § 174(a) or as deferred expenses amortizable ratably over a period of not less than 60 months under § 174(b). Pursuant to § 1.174–1, research and experimental expenditures that are not treated as expenses or deferred expenses under § 174 must be treated as capital expenditures. Further, § 1.174–1 provides that the expenditures to which § 174 applies may relate either to a general research program or to a particular project.

(c) If a taxpayer has not treated research and experimental expenditures as expenses under § 174(a), § 174(a)(2)(B) and § 1.174–3(b)(2) provide that the taxpayer may, with consent, adopt the expense method at any time.

(d) If a taxpayer has treated research and experimental expenditures as expenses under § 174(a), § 174(a)(3) and § 1.174–3(b)(3) provide that the taxpayer may, with consent, change to a different method of treating research and experimental expenditures.

(e) If a taxpayer has treated research and experimental expenditures as deferred expenses under § 174(b), § 174(b)(2) and § 1.174–4(b)(2) provide that the taxpayer may, with consent, change to a different method of treating research or experimental expenditures or to a different period of amortization for deferred expenses.

(2) Scope .

(a) Applicability . This change applies to any taxpayer that is changing:

(i) from treating research and experimental expenditures for a particular project or projects as expenses under § 174(a) to treating such expenditures as deferred expenses under § 174(b), or vice versa ;

(ii) to a different period of amortization for research and experimental expenditures for a particular project or projects that are being treated as deferred expenses under § 174(b); or

(iii) from treating research and experimental expenditures for a particular project or projects as expenses under § 174(a) or deferred expenses under § 174(b) to treating such expenditures as a capital expenditure under § 263(a), or vice versa .

(b) Inapplicability . This change does not apply to:

(i) a portion of the research and experimental expenditures paid or incurred for a particular project during the year of change or in subsequent taxable years (that is, the change must apply to all of such expenditures; see §§1.174–3(a) and 1.174–4(a)(5)); (ii) a change in the treatment of computer software costs under Rev. Proc. 2000–50, 2000–2 C.B. 601, as modified by Rev. Proc. 2007–16, 2007–4 I.R.B. 358 (but see section 9 of this APPENDIX for making that change); or

(iii) a change in the treatment of Year 2000 costs under Rev. Proc. 97–50, 1997–2 C.B. 525 (but see section 9.02 of this APPENDIX for making that change).

(3) Scope limitations clarified . The scope limitation under section 4.02(7) of this revenue procedure is applied on a project by project basis.

(4) Manner of making change . (a) This change is made on a cut-off basis and applies to all research and experimental expenditures paid or incurred for a particular project or projects on or af

September 8, 2008 636 2008–36 I.R.B.

year, and all subsequent affected taxable year(s), on or before November 15, 2006.

(3) Time for making the change . The change in method of accounting under section 8.02 of this APPENDIX must be made for the taxpayer’s first or second taxable year ending on or after December 31, 2005.

(4) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change.

(5) Additional requirements . (a) The guidance about creating and maintaining separate timber accounts for each qualified timber property referenced in section C.2. of Notice 2006–47, 2006–1 C.B. 892, 895, must be followed.

(b) The statement required under In- terim Rules in section C.2. of Notice 2006–47, 2006–1 C.B. 892, 896, must be attached to the Form 3115.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 8.02 of this APPENDIX is “101.” See section 6.02(4) of this revenue procedure.

(7) Contact information . For further information regarding a change under this section, contact Jennifer Bernardini at 202–622–3110 (not a toll-free call).

.03 Deduction for capital costs incurred in complying with Environmental Protec- tion Agency sulfur regulations .

(1) Description of change . This change applies to a small business refiner (as defined in § 45H(c)(1)) that wants to elect under § 179B(a) to deduct 75 percent of the qualified capital costs (as defined in § 45H(c)(2)) that are paid or incurred by the taxpayer during the taxable year.

(2) Scope .

(a) Applicability . This change in accounting method applies to a small business refiner that, before June 15, 2006, filed its federal tax return for a taxable year ending after December 31, 2002, in which qualified capital costs were paid or incurred after December 31, 2002, and that wants to make a § 179B(a) election for all qualified capital costs paid or incurred during that taxable year.

(b) Inapplicability . This change does not apply to:

.02 Reserved .