IRS Releases Framework for Section 174 Amortization Guidance

On September 8, 2023, the IRS issued Notice 2023-63, which provides long-awaited guidance for the types of costs that must be amortized under Section 174. This guidance provides the framework for forthcoming regulations related to Section 174 and sheds some light on a variety of topics, including the definition of “software development activities” under 174(c)(3), as well as which party needs to amortize costs under 174 when research is performed under a contract (funded research).

This notice applies to tax years ending after September 8, 2023, so it is not binding for taxpayers with tax years ending prior to that date. However, it is important to note that even if this guidance is not relied upon to determine 174 costs for tax years ending prior to September 8, 2023, the 174 amortization requirement still applies to all 2022 tax returns. Additionally, the IRS intends to issue guidance on providing procedures for taxpayers to obtain automatic consent to change methods of accounting to comply with this notice. The IRS is taking comments, suggestions, and feedback on this guidance until November 24, 2023. We anticipate that the proposed regulations will not be released until late 2023 at the earliest.

Stay tuned for a more in-depth analysis from our team. If you have any questions, please do not hesitate to reach out.