IRS eases R&D accounting change filing by eliminating Form 3115 requirement for 2022

Under the 2017 Tax Cuts and Jobs Act (TCJA), domestic research and development (R&D) expenses must be amortized over five years and foreign R&D expenses are amortized over 15 years, beginning with tax years that start after December 31, 2021.

Prior to that time, businesses had the option of treating research and development expenses as either currently deductible or as capital costs to be amortized over time.

Simplified method of accounting change

The IRS provided guidance this week in Rev. Proc. 2023-08 that simplified the procedure for implementing this change. It provides an automatic change in method of accounting procedure for taxpayers to comply with IRC §174 by filing a statement with the taxpayer’s original federal income tax return for the first tax year in which the TCJA’s IRC §174 changes become effective instead of filing Form 3115, Application for Change in Accounting Method. This provides a simplified way to change an accounting method.

Taxpayers who make a change in the method of accounting for R&D expenses after their first tax year in which TCJA changes become effective cannot apply the simplified approach provided in the most recent IRS guidance, but instead must file Form 3115 in that subsequent taxable year.

Will TCJA changes in R&D changes be delayed or reversed?

Many have expected Congress to either delay or reverse the TCJA changes to R&D expenses. Currently, this remains under consideration in addition to other potential tax-related changes such as the expansion of the child tax credit, a major retirement package (Secure Act 2.0), and numerous so-call tax-extenders, among a host of others. At this writing, Congress is rushing to complete its work on funding the government before the holidays. Whether one or more of tax changes make it through this lame-duck session of Congress remains to be seen.