On Sept. 8, the IRS published Notice 2023-63 providing interim guidance on the capitalization and amortization of SRE expenditures incurred in taxable years beginning after Dec. 31, 2021, under Section 174 as amended by the Tax Cuts and Jobs Act of 2017 (TCJA). This long-awaited guidance outlines some of the provisions that will be included in future proposed regulations. The interim guidance addresses many questions while leaving other anticipated questions unaddressed.
Until now, the IRS had provided only procedural guidance on how to make changes to the Section 174 accounting method, which is unchanged by the notice but could be revised by subsequent guidance.
The following are key provisions of the interim guidance:
The notice requests comments, specifically feedback on partnerships; merger, consolidation, division, or liquidation scenarios; startup companies; and the Section 280C election.
Taxpayers may choose to rely on the interim guidance for expenditures paid or incurred in taxable years beginning after Dec. 31, 2021, provided the taxpayer relies on the guidance in its entirety and in a consistent manner.
The U.S. Department of the Treasury and the IRS intend to issue additional procedural guidance, but, until such time, taxpayers may rely on the existing procedural guidance in Section 7.02 of Revenue Procedure 2023-24 to change their methods of accounting under Section 174 to comply with Notice 2023-63.
Although Congress still is considering the possibility of repealing or delaying Section 174, no significant progress has been made to date. Taxpayers currently preparing their 2022 federal income tax returns should work with their tax advisers to consider how the interim guidance in Notice 2023-63 might impact their returns.
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