SECTION 7. RESEARCH AND

EXPERIMENTAL EXPENDITURES (§ 174).

01 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 Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (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. 01 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 7.01(1) (a) of this revenue procedure . The changes described in section 7. 01(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 . This change described in section 7. 01(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 section 9. 01 of this revenue procedure).

(c) change to rely on interim guidance provided in sections 8 and 9 of Notice 2023-63, as modified by Notice 2024-12. (d) 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 . The change under section 7. 01(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 December 31, 2021 . 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. 01(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. 01(3)(a)(ii) is considered a Form 3115 for purposes of the automatic

change procedures of Rev. Proc. 201513. 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. 01(1)(a) takes effect for the applicant (year of change);

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

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

(E) 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. 01(3)(b)(i)(B) of this revenue procedure, the change under section 7. 01(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.

(B) Exception for negative modified § 481(a) adjustment . If a change described in section 7. 01(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.

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(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. 01(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 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. 01(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. 01(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. 01(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. 01 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 rules inapplica- ble .

(a) In general . The eligibility rules in section 5. 01(1)(d) and (f) of Rev. Proc. 2015-13, 2015-5 I. R. B. 419, do not apply to a change described in section 7. 01(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. 01(1)(a) of this revenue procedure for its second taxable year beginning after December 31, 2021, regardless of whether the taxpayer made 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 the change under section 7. 01(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. 01(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 change its method of accounting under section 7. 01(1)(a) in an effort to comply with § 174 for the first taxable year beginning after December 31, 2021. 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 “265. ” (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. 01 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. 01(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 permis

sible 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).