Section 174 R&D Capitalization Requirements: New IRS Guidance, Rev. Proc. 2024-9, Identifying Assets, and More

Section 174 requires costs to be capitalized and amortized over five years if they are domestic expenses or 15 years if foreign. The amendment to Section 174 has raised a number of concerns for U.S. taxpayers with recent proposed legislation being released specifically aimed at R&D expensing.

Under Section 174, related expenses are charged to a capital account and give rise to basis. However, you must first define and identify the assets connected to such expenditures. Section 1.174-2 states that "...expenditures incurred in connection with the taxpayer's trade or business which represent research and development costs in the experimental or laboratory sense... . Whether expenditures qualify as research or experimental expenditures depends on the nature of the activity to which the expenditures relate, not the nature of the product or improvement being developed... ." In addition, what is considered to be qualifying assets under the rule is very broad and hinges on the nature of the activity in which the asset is used.

The current requirements under Section 174 will cause businesses to recognize significant income due to the change. The IRS released Revenue Procedure 2023-11 to facilitate the change in accounting method and offer some relief for late transitions, which has since been replaced by Revenue Procedure 2024-9. Practitioners working with companies engaging in research and experimental activities need to understand the R&D requirements.

Listen as our panel discusses the revised capitalization requirements, identifying assets, making the automatic method change under Rev. Proc. 2024-9, and other key issues.

1. Section 174 legislation update
2. R&D costs
3. Implementing Section 174 capitalization requirements
4. Best practices

The panel will cover these and other key issues:

• What costs are included in the definition of R&D?
• What issues are presented when implementing Section 174 capitalization requirements?
• What is the impact on taxable dispositions, reporting, and planning?
• How are capitalized expenses treated if the assets are transferred tax free?

Learning Objectives

After completing this course, you will be able to:

• Determine what costs are considered R&D costs
• Decide how to handle the expense deduction in certain nonconforming states
• Ascertain how to properly make the accounting method change for Section 174 revisions

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).