SECTION 3. MODIFICATIONS TO

REV. PROC. 2023-24

.01 Modification of section 7 of Rev. Proc. 2023-24 . Section 7.02 of Rev. Proc. 2023-24, is modified to read as follows: .02 Change in Method of Accounting for SRE Expenditures .

(1) Description of change . (a) In general . This change applies to a taxpayer that wants to change its method of accounting for expenditures paid or incurred in taxable years beginning after December 31, 2021, to:

(i) comply with § 174, as amended by § 13206(a) of the TCJA; or

(ii) rely on interim guidance provided in sections 3, 4, 5, 6, or 7 of Notice 202363, 2023-39 I.R.B. 919, as modified by Notice 2024-12, 2024-5 I.R.B. 616.

(b) References to § 174 . 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.

(c) Changes included in section 7.02(1) (a) of this revenue procedure . The changes described in section 7.02(1)(a) of this revenue procedure include, among other changes, a change:

(i) from capitalizing specified research or experimental (SRE) expenditures, as defined in § 174(b) and section 4.02(2) of Notice 2023-63, as applicable, to inventoriable property or depreciable property and recovering such expenditures through cost of goods sold or depreciation, respectively, to capitalizing and amortizing such expenditures under § 174(a) or section 3.02 of Notice 2023-63, as applicable; and (ii) from treating an expenditure that does not meet the definition of an SRE

expenditure as an SRE expenditure subject to capitalization and amortization under § 174(a) or section 3.02 of Notice 2023-63, as applicable, to treating that expenditure under the appropriate provision of the Code.

(2) Inapplicability . The change described in section 7.02(1)(a) of this revenue procedure does not apply to:

(a) a change in the treatment of acquired, leased, or licensed computer software under Rev. Proc. 2000-50, 2000-2 C.B. 601, as modified by Rev. Proc. 2007-16, 2007-1 C.B. 358 (see section 9.01 of this revenue procedure);

(b) a change in the treatment of research or experimental expenditures under former § 174 (that is, § 174 as in effect prior to the amendments made by § 13206(a) of the TCJA), 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, respectively); or

(c) a change from treating SRE expenditures paid or incurred by a taxpayer that transfers related property (that is, property with respect to which such SRE expenditures were paid or incurred) in a § 351 exchange as amortizable by the transferee corporation following such exchange to treating such SRE expenditures as amortizable by the transferor following such exchange (as such a change is not a change in method of accounting).

(3) Manner of making change . (a) Year of change is the first taxable year beginning after December 31, 2021 .

(i) Cut-off basis . A change under section 7.02(1)(a) of this revenue procedure for the taxpayer’s 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 Decem- ber 31, 2021 . The requirement of § 1.4461(e)(3)(i) to file a Form 3115, Applica- tion 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(1)(a) of this revenue procedure for which the year of change is the taxpayer’s 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(3)(a)(ii) is considered a Form 3115 for purposes of the automatic change 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 expenditures after December 31, 2021; (B) the beginning and ending dates of the first taxable year in which the change described in section 7.02(1)(a) takes effect for the applicant (year of change);

(C) the designated automatic accounting method change number for this change (see section 7.02(7) of this revenue procedure);

(D) a general description of the type of expenditures included as SRE expenditures;

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

(F) a declaration that the applicant is changing its method of accounting to capitalize SRE expenditures to a SRE capital account, and amortize the capitalized amount over either a 5-year period for domestic research or a 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 § 174 or sections 3 through 7 of Notice 2023-63, as applicable. 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 and cut-off .

(A) In general . Except as provided in section 7.02(3)(b)(i)(B) of this revenue procedure, the change under section 7.02(1)(a) 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 that takes into account only expenditures paid or incurred in taxable years beginning after December 31, 2021.

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(B) Exception for negative modified § 481(a) adjustment . If a change described in section 7.02(3)(b)(i)(A) of this revenue procedure results in a modified § 481(a) adjustment that is negative, the taxpayer may instead choose to implement the change on a cut-off basis.

(ii) Form 3115 and required statement . In completing a Form 3115, Application for Change in Accounting Method, to make the change in method of accounting under section 7.02(1)(a) of this revenue procedure for a year of change later than the first taxable year beginning after December 31, 2021, a taxpayer must include on an attachment to the Form 3115: (A) a general description of the type of expenditures included as SRE expenditures;

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

(C) a declaration that provides the reason for which the applicant is changing its method of accounting under section 7.02(1)(a) of this revenue procedure. The declaration must also state whether the applicant is making the change on a cut-off basis under section 7.02(3)(b)(i) (B) of this revenue procedure or with a modified § 481(a) adjustment that takes into account only expenditures paid or incurred in taxable years beginning after December 31, 2021, under section 7.02(3)(b)(i)(A) of this revenue procedure.

(4) 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 expenditures paid or incurred in the first taxable year beginning after December 31, 2021, to comply with § 174 if the taxpayer:

(a) reported the amount of SRE expenditures paid or incurred for such taxable year on Part VI of Form 4562, Deprecia- tion and Amortization, filed with the Federal tax return, and

(b) properly capitalized and amortized such SRE expenditures in accordance with § 174 for such taxable year.

(5) Certain eligibility rule inapplica- ble .

(a) In general . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to a change described in section 7.02(1)(a) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021.

(b) Changes made in successive tax- able years . A taxpayer may make a change described in section 7.02(1)(a) of this revenue procedure for its second taxable year beginning after December 31, 2021, regardless of whether the taxpayer made, or purported to make, a change for the same item for its first taxable year beginning after December 31, 2021.

(6) Limited audit protection . A taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for a change under section 7.02(1)(a) 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 a change under section 7.02(1)(a) of this revenue procedure in the second taxable year beginning after December 31, 2021, with respect to expenditures paid or incurred in the first taxable year beginning after December 31, 2021, if the taxpayer did not make, or attempt to make, a change described in section 7.02(1)(a) for the first taxable year beginning after December 31, 2021. See section 8.02(2) of Rev. Proc. 2015-13.

(7) Designated automatic account- ing method change number . The designated automatic accounting method change number for a change under section 7.02(1)(a)(i) of this revenue procedure is “265.” The designated automatic accounting method change number for a change under section 7.02(1)(a)(ii) of this revenue procedure is “270.”

(8) 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 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, 1.174-2, 1.1743, and 1.174-4 for taxable years in which former § 174 was in effect.

(9) No ruling on method used . The consent granted under section 9 of Rev. Proc. 2015-13 for a change made under section 7.02(1)(a)(i) of this revenue procedure is not a determination by the Commissioner that the new method of accounting is a permissible method of accounting, nor does it create any presumption that the new method of accounting is a permissible method of accounting. The director will ascertain whether the new method of accounting is a permissible method of accounting.

(10) Contact information . For further information regarding a change under this section, contact Bruce Chang at (202) 317-7005 (not a toll-free number). .02 Clarification of section 9 of Rev. Proc. 2023-24 . Section 9.01 of Rev. Proc. 2023-24 is clarified to provide that section 5 of Rev. Proc. 2000-50 (costs of developing computer software) applies to costs of developing computer software paid or incurred in any taxable year beginning on or before December 31, 2021.

(1) Section 9.01(1) of Rev. Proc. 202324 is clarified to read as follows: (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for the costs of computer software to a method described in Rev. Proc. 2000-50, 2000-2 C.B. 601, as modified by Rev. Proc. 2007-16, 2007-1 C.B. 358. Section 5 of Rev. Proc. 2000-50 describes the methods applicable to the costs of developing computer software. Section 6 of Rev. Proc. 2000-50 describes the method applicable to the costs of acquired computer software. Section 7 of Rev. Proc. 2000-50 describes the method applicable to leased or licensed computer software. Section 13206 of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), amended § 174 to treat the costs of software development as research or experimental expenditures, effective for amounts paid or incurred in taxable years beginning after December 31, 2021. Section 12 of Notice 2023-63, 2023-39 I.R.B.

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919, as modified by Notice 2024-12, provides that, as a result of the TCJA amendments to § 174 and the rules in sections 3 through 5 of Notice 2023-63, section 5 of Rev. Proc. 2000-50 is obsolete for costs of developing software paid or incurred in taxable years beginning after December 31, 2021. Accordingly, section 5 of Rev. Proc. 2000-50 (costs of developing computer software) applies only to costs of developing computer software paid or incurred in any taxable year beginning on or before December 31, 2021.

(2) Section 9.01(3) of Rev. Proc. 202324 is clarified to read as follows: (3) Inapplicability . This change does not apply to costs of developing computer software that are paid or incurred in taxable years beginning after December 31, 2021. .03 Modification of section 19 of Rev. Proc. 2023-24 . Section 19 of Rev. Proc. 2023-24 is modified to add new section 19.02 to read as follows: .02 Change to rely on the interim guid- ance provided in section 8 of Notice 2023- 63, 2023-39 I.R.B. 919 . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting under § 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, 2023-39 I.R.B. 919, so that the costs allocable to a long-term contract accounted for using the PCM include amortization deductions of specified research or experimental (SRE) expenditures, as defined in § 174(b) and section 4.02(2) of Notice 2023-63, as applicable, under § 174(a)(2)(B), rather than the capitalized amount of such expenditures, and the amortization deductions of such expenditures is treated as incurred for purposes of determining the percentage of contract completion in the taxable year the amortization is deducted. For purposes of determining the percentage of contract completion, estimated total allocable contract costs include either (1) all amortization of SRE expenditures that directly benefit or are incurred by reason of the performance of the long-term contract, or (2) only that portion of such amortization expected to be incurred and deducted during the term of the

contract. A taxpayer using the first alternative is required to report any portion of the contract price not previously reported by the taxable year following the taxable year in which the contract is completed, notwithstanding that some portion of the SRE expenditures remain unamortized. See § 460(b)(1).

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

(a) A change in method of accounting under § 460 with respect to expenditures capitalized under § 59(e)(2)(B), or under § 174(b) prior to its amendment by § 13206(a) of the TCJA.

(b) A change in method of accounting for independent research and development expenditures, as defined in § 460(c)(5), which are not allocable contract costs.

(c) Any contract not accounted for under the PCM, as described in § 460(b) (1) and § 1.460-4(b)(2), as of the beginning of the year of change.

(3) Manner of making change . (a) Cut-off basis . A change under section 19.02(1) of this revenue procedure for the taxpayer’s first taxable year beginning after December 31, 2021, applies to the § 460 treatment of SRE expenditures paid or incurred in taxable years beginning after December 31, 2021. Accordingly, such change is made on a cut-off basis, and applies to all long-term contracts for which an SRE expenditure is an allocable contract cost, including long-term contracts entered into before the beginning of the year of change. A taxpayer making this change does not recompute its taxable income under § 1.460-4(b) for any taxable year beginning on or before December 31, 2021. (b) Modified § 481(a) adjustment or cut-off basis .

(i) In general . Except as provided in section 19.02(3)(b)(ii) of this revenue procedure, a change under section 19.02(1) 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 that takes into account the § 460 treatment of SRE expenditures paid or incurred in taxable years beginning after December 31, 2021. Such change applies to all long-term contracts for which an SRE expenditure is an allocable con

tract cost, including long-term contracts entered into before the beginning of the year of change.

(ii) Exception for negative modified § 481(a) adjustment . If a change described in section 19.02(3)(b)(i) of this revenue procedure results in a modified § 481(a) adjustment that is negative, the taxpayer may instead choose to implement the change on a cut-off basis.

(4) 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, does not apply to a change described in section 19.02(1) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021. (5) Limited audit protection . A taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for a change under section 19.02(1) of this revenue procedure with respect to the § 460 treatment of expenditures paid or incurred in taxable years beginning on or before December 31, 2021.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.02 of this revenue procedure is “271.”

(7) Contact information . For further information regarding a change under section 19.02 of this revenue procedure, contact John Aramburu at (202) 317-7006 (not a toll-free number).