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. Unless otherwise stated, references to § 174 in this section 7.01 refer to § 174 as in effect prior to amendment by § 13206 of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA).

(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 a charge to capital account. 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. Finally, §§ 1.174-3(a) and 1.1744(a)(5) provide that in no event will a taxpayer be permitted to apply one method as to part of the expenditures relative to a particular project and apply a different method to the balance of the expenditures relating to the same project for the same taxable year.

(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) Applicability .

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(a) In general . 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);

(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 charge to capital account, or vice versa; or

(iv) from treating research and experimental expenditures under any provision of the Code other than § 174 to treating such expenditures under § 174 and the regulations thereunder.

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

(i) 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, 2007-1 C.B. 358 (but see section 9 of this revenue procedure for making that change);

(ii) a change in the treatment of Year 2000 costs under Rev. Proc. 97-50, 1997-2 C.B. 525; or

(iii) any amount paid or incurred in any taxable year for which § 174 as amended by § 13206 of the TCJA is in effect.

(3) Certain eligibility rule inapplica- ble . The eligibility rule in section 5.01(1) (f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, is not applicable to this change. (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 after the beginning of the year of change. See § 174(b)(2), and §§ 1.174-3(a), 1.1743(b)(2), and 1.174-4(a)(5) for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(b) The requirement under §§ 1.1743(b)(2), 1.174-3(b)(3), and 1.174-4(b) (2) to file an application (that is, a Form 3115) no later than the end of the first taxable year in which the different method or

different amortization period is to be used is waived for this change. However, see section 6.03 of Rev. Proc. 2015-13 for filing requirements applicable to a change under this section 7.01.

(c) The consent granted under section 9 of Rev. Proc. 2015-13 satisfies the consent required under §§ 174(a)(2)(B), 174(a) (3), and 174(b)(2), and §§ 1.174-3(b)(2), 1.174-3(b)(3), and 1.174-4(b)(2). (5) Additional requirement . A taxpayer must attach to its Form 3115 a written statement providing:

(a) the information required in § 1.1743(b)(2) if the taxpayer is changing to treating research and experimental expenditures as expenses under § 174(a);

(b) the information required in § 1.1743(b)(3) if the taxpayer is changing from treating research and experimental expenditures as expenses under § 174(a); or

(c) the information required in § 1.1744(b)(2) if the taxpayer is changing from treating research and experimental expenditures as deferred expenses under § 174(b) or is changing to a different period of amortization for research and experimental expenditures being treated as deferred expenses under § 174(b).

(6) No audit protection . A taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 in connection with this change. See section 8.02(2) of Rev. Proc. 2015-13. (7) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 7.01 is “17.” (8) Contact information . For further information regarding a change under this section, contact Martha M. Garcia or John M. Deininger at (202) 317-6853 (not a toll-free number).

.02 Specified Research or Experimental Expenditures .

(1) Description of change . (a) This change applies to a taxpayer that changes its method of accounting for specified research or experimental expenditures (as defined under § 174(b)) to the required § 174 method (as defined in section 7.02(1)(b) of this revenue procedure) to comply with § 174. This change includes a change from capitalizing specified research and experimental expenditures to inventoriable property or

depreciable property and recovering such expenditures through cost of goods sold or depreciation, respectively, to the required § 174 method. Unless otherwise stated, references to “§ 174” in this section 7.02 refer to § 174 as amended by § 13206(a) of the TCJA. Section 13206(e) of the TCJA provides that the amendments made by § 13206 of the TCJA apply to amounts paid or incurred in taxable years beginning after December 31, 2021.

(b) Section 174(a)(1) provides that in the case of a taxpayer’s specified research or experimental expenditures for any taxable year, except as provided in § 174(a) (2), no deduction is allowed for such expenditures. Section 174(a)(2) provides that the taxpayer must charge such expenditures to capital account and is allowed an amortization deduction of such expenditures ratably over the 5-year period (15year period in the case of any specified research or experimental expenditures which are attributable to foreign research within the meaning of § 41(d)(4)(F) of the Code) beginning with the midpoint of the taxable year in which such expenditures are paid or incurred. The method of accounting described in this section 7.02(1)(b) is referred to as the “required § 174 method” in this section 7.02.

(2) Applicability . This change to the required § 174 method applies to specified research or experimental expenditures (as defined in § 174(b)) paid or incurred in taxable years beginning after December 31, 2021. (3) Inapplicability . This change does not apply to:

(a) a change in the treatment of acquired, leased, or licensed computer software under Rev. Proc. 2000-50, 200052 I.R.B. 601, as modified by Rev. Proc. 2007-16, 2007-1 C.B. 358 (see section 9.01 of this revenue procedure); or (b) a change in the treatment of research or experimental expenditures under former § 174, or software development expenditures, paid or incurred in taxable years beginning before January 1, 2022 (see sections 7.01 and 9.01 of this revenue procedure).

(4) Manner of making change . (a) First taxable year beginning after December 31, 2021 .

(i) Cut-off basis . The change under section 7.02 of this revenue procedure for

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specified research or experimental expenditures paid or incurred in the first taxable year beginning after December 31, 2021, is implemented on a cut-off basis.

(ii) Statement in lieu of a Form 3115 for first taxable year beginning after December 31, 2021 . Except as otherwise provided in section 7.02(5) of this revenue procedure, the requirement of § 1.446-1(e) (3)(i) to file a Form 3115, Application for Change in Accounting Method, is waived and a statement in lieu of a Form 3115 is authorized for the change in method of accounting under section 7.02 of this revenue procedure for which the year of change is the first taxable year beginning after December 31, 2021. Notwithstanding the definition of Form 3115 in section 3.07 of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, the statement in lieu of a Form 3115 that is permitted under this section 7.02(4)(a)(ii) is considered a Form 3115 for purposes of the automatic consent procedures of Rev. Proc. 2015-13. The requirement to file the duplicate copy, under section 6.03(1) (a) of Rev. Proc. 2015-13, is waived. The statement must include the following information for each applicant:

(A) the name and employer identification number or social security number, as applicable, of the applicant that has paid or incurred specified research or experimental expenditures after December 31, 2021; (B) the beginning and ending dates of the first taxable year in which the change to the required § 174 method takes effect for the applicant (year of change);

(C) the designated automatic accounting method change number for this change (see section 7.02(8) of this revenue procedure);

(D) a description of the type(s) of expenditures included as specified research or experimental expenditures;

(E) the amount of specified research or experimental expenditures paid or incurred by the applicant during the year of change; and

(F) a declaration that the applicant is changing the method of accounting for specified research or experimental expenditures to capitalize such expenditures to a specified research or experimental capital account, and amortize such amount over either a 5-year period for domestic research or 15-year period for foreign

research (as applicable) beginning with the mid-point of the taxable year in which such expenditures are paid or incurred in accordance with the method permitted under § 174 for the year of change. Also, the declaration must state that the applicant is making the change on a cut-off basis.

(b) Year of change later than the first taxable year beginning after December 31, 2021 . (i) Modified § 481(a) adjustment . The change under section 7.02 of this revenue procedure for a year of change later than the first taxable year beginning after December 31, 2021, is made with a modified § 481(a) adjustment, and should take into account only specified research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021.

(ii) Form 3115 . In completing a Form 3115, Application for Change in Accounting Method, to make the change in method of accounting under section 7.02 of this revenue procedure with respect to any year of change later than the first taxable year beginning after December 31, 2021, a taxpayer must include on an attachment to Form 3115:

(A) a description of the type(s) of expenditures included as specified research or experimental expenditures;

(B) the taxable year(s) in which the specified research or experimental expenditures subject to the change were paid or incurred by the applicant; and

(C) a declaration that the applicant is changing its method of accounting for specified research or experimental expenditures to capitalize such expenditures to a specified research or experimental capital account, and amortize such amount over either a 5-year period for domestic research or 15-year period for foreign research (as applicable) beginning with the mid-point of the taxable year in which such expenditures are paid or incurred in accordance with the method permitted under § 174 for the year of change. Also, the declaration must state that the applicant is making the change with a modified § 481(a) adjustment that takes into account only specified research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021.

(5) Transition rule . A taxpayer who filed a Federal tax return on or before January 17, 2023, for a taxable year beginning after December 31, 2021, is deemed to have complied with the § 446 method change procedures and section 7.02 of this revenue procedure to change its method of accounting for specified research or experimental expenditures paid or incurred in the first taxable year beginning after December 31, 2021, to the required § 174 method to comply with § 174 if the taxpayer:

(a) reported the amount of specified research or experimental expenditures paid or incurred for such taxable year on Part VI of Form 4562, Depreciation and Amortization, filed with the Federal tax return, and

(b) properly capitalized and amortized such specified research or experimental expenditures in accordance with the required § 174 method for such taxable year.

(6) Certain eligibility rule temporar- ily inapplicable . This eligibility rule in section 5.01(1)(f) of Rev. Proc. 201513, 2015-5 I.R.B. 419, does not apply to changes to the required § 174 method for the taxpayer’s first taxable year beginning after December 31, 2021.

(7) No audit protection for expenditures paid or incurred in taxable years prior to the first taxable year in which § 174 becomes effective or for a year of change that is the taxable year immediately sub- sequent to the first taxable year in which § 174 becomes effective . A taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for the change under section 7.02 of this revenue procedure with respect to expenditures paid or incurred in taxable years beginning on or before December 31, 2021. Additionally, a taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for the change under section 7.02 of this revenue procedure with respect to expenditures paid or incurred in taxable years beginning after December 31, 2021, if such change is made for the taxable year immediately subsequent to the first taxable year in which § 174 becomes effective. See section 8.02(2) of Rev. Proc. 2015-13.

(8) Designated automatic accounting method change number . The designated automatic accounting method change

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number for a change under section 7.02 of this revenue procedure is “265.”

(9) No inference relating to expendi- tures paid or incurred in taxable years prior to the first taxable year in which § 174 becomes effective . No inference may be drawn from section 7.02 of this revenue procedure regarding the treatment of research or experimental expenditures paid or incurred in, and changes in methods of accounting for, taxable years in which former § 174 was in effect, including issues relating to the application of §§ 1.174-1, 1.174-3, and 1.174-4 of the Income Tax Regulations for taxable years in which former § 174 was in effect.

(10) Contact information . For further information regarding a change under this section, contact Martha M. Garcia at (202) 317-6853 (not a toll-free number).