On December 17, 2024, the Internal Revenue Service (IRS) issued Revenue Procedure (Rev. Proc.) 2025-8, which provides updated procedural guidance for taxpayers to file an automatic change of accounting related to Specified Research or Experimental Expenditures (SREs) as defined under Internal Revenue Code (IRC) Section 174 for tax years beginning in 2024.
The Tax Cuts and Jobs Act (TCJA) of 2017, required businesses to begin to capitalize SREs for tax years beginning after December 31, 2021, and amortize those costs over either five years for domestic research expenditures or 15 years for foreign research expenditures.
Prior Guidance on Capitalization Requirement
To comply with the capitalization requirements under IRC Section 174, many taxpayers were required to file a change of accounting method for their SREs from immediate expensing to capitalization. While accounting method changes generally require the consent of the IRS.
There is a published list of accounting method changes that are eligible for automatic consent. Rev. Proc. 2023-11 allowed companies to use the automatic consent procedures in lieu of filing a Form 3115 and allowed taxpayers to file a statement with an originally filed federal 2022 income tax return.
Key Provisions of Rev. Proc. 2023-11 and TCJA Amendments
Rev. Proc. 2023-11 and the TCJA amendment to IRC Section 174 provided that the accounting method is changed pursuant to a cut-off method for this purpose. Accordingly, only new costs paid or incurred in tax years beginning after December 31, 2021, became subject to the new amortization requirement.
SREs in prior tax years would continue with the accounting method applied in those years. Taxpayers with a year of change later than the first taxable year beginning after December 31, 2021, were required to file a Form 3115 to change their methods of accounting.
Modifications Introduced by Rev. Proc. 2024-23 and Rev. Proc. 2024-34
Rev. Proc. 2024-23 and Rev. Proc. 2024-34 later modified when taxpayers could use the automatic method change for SREs to comply with IRC Section 174 and/or rely on interim guidance published by the IRS in Notices 2023-63 and 2024-12 (but did not provide audit protection).
Prior to their issuance, taxpayers seeking to file successive automatic changes to comply with the IRC Section 174 capitalization regime could only do so for changes made for the first and second tax years, including short tax years, beginning after December 31, 2021.
Updated Guidance Under Rev. Proc. 2025-8
Rev. Proc. 2025-8 contemplates that taxpayers may desire to file multiple, successive accounting method changes specific to SREs due to guidance updates or the discovery of new facts. Accordingly, taxpayers may now file an automatic method change related to SREs irrespective of whether the taxpayer has already made a prior SRE method change for taxable years beginning in 2022 – 2024.
Cherry Bekaert Insights: Key Considerations for Taxpayers
Waiver of Five-Year Rule
Section 5.01(1)(f) of Rev. Proc. 2015-13, which would normally disallow a taxpayer that made an accounting method change regarding SREs for any of the prior five years to qualify for another automatic change, has been waived for a year.
A taxpayer that has already filed a return for a taxable year beginning in 2024 may be able to file an amended or superseded income tax return to make an automatic accounting method change for that year.
A taxpayer that was planning to file a non-automatic change for a taxable year beginning in 2024 may now file an automatic IRC Section 174-related method change (i.e., an additional Form 3115 may now be filed as an automatic change even if previously filed regarding IRC Section 174).
Audit Protection
A taxpayer that files an automatic IRC Section 174-related method change for any taxable year beginning in 2024 will receive audit protection. Even if it did not file a change to comply with IRC Section 174 for its first taxable year beginning after December 31, 2021.
When audit protection applies, the IRS will not require the taxpayer to change its method of accounting for the same item for a tax year prior to the requested year of change.
Final Year of Trade or Business
A taxpayer in the final year of its trade or business may file a Form 3115 for an automatic change to the required accounting method for SREs for any taxable year beginning in 2024.
Effective Date
The rules provided in Rev. Proc. 2025-8 are effective for Forms 3115 filed on or after December 17, 2024.
Your Guide You Forward
As both taxpayers and the IRS wait to see whether Congress makes any changes to the IRC Section 174 capitalization regime, the updates provided in Rev. Proc. 2025-8 allow taxpayers to adopt capitalization more easily as the guidance evolves.
If you have questions or want to learn more about Section 174 capitalization and amortization of SRE expenditures or potential Congressional action regarding SREs, please consult your Cherry Bekaert advisor or contact Cherry Bekaert’s Tax Credits & Incentives Advisory practice today.
Related Insights
- Article: Navigating Tax Benefits: Comparing IRC Section 174 and Section 41 for Manufacturers
- Article: IRS Extends 45-Day Period To Update Requirements With IRC Section 41 Claims
- Article: Research and Development Tax Credit Opportunities Available to Government Contractors
- Podcast: Take Advantage of R&D Credits for Government Contractors
