Rev. Proc. 2025-8, issued on December 17, 2024, provides modified procedural guidance that expands the ability of taxpayers with taxable years beginning in 2024 to file an automatic accounting method change for specified research or experimental expenditures (SREs) under Internal Revenue Code Section 174. Effective for tax years beginning in 2022, the Tax Cuts and Jobs Act requires taxpayers to capitalize SREs in the year the amounts are paid or incurred and amortize the amounts over five or 15 years for domestic research or foreign research, respectively. Due to this shift in treatment, taxpayers using a different historical method of accounting for Section 174 costs were required to file a method change to comply with the new rules for their first taxable year beginning after December 31, 2021.
Rev. Proc. 2025-8 Waives Certain Eligibility Rules for an Additional Year
The automatic accounting method change for SREs under Rev. Proc. 2024-23, as modified by Rev. Proc. 2024-34, permits taxpayers seeking to file successive automatic changes to comply with the updated Section 174 rules for any taxable year beginning in 2022 or 2023, regardless of whether the taxpayer has already made a change for the same item for a taxable year beginning in 2022 or 2023. However, the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 would preclude a taxpayer that had made a change in its SREs for any of the previous five years from qualifying for another automatic accounting method change for its SREs for a taxable year beginning in 2024.
Taxpayers may want or need to file successive accounting method changes for SREs to comply with new technical guidance issued by the IRS or refine their accounting method. Rev. Proc. 2025-8 addresses this issue by permitting taxpayers to file an automatic Section 174 method change for any taxable year beginning in 2024, regardless of whether the taxpayer has already made a change for its SREs for a taxable year beginning in 2022, 2023, or 2024. Taxpayers that filed, or were planning on filing, a non-automatic accounting method change for a taxable year beginning in 2024, may be able to file an automatic change for SREs even if an accounting method change has been filed for any year beginning after December 31, 2021. Taxpayers that have already filed a return for a taxable year beginning in 2024 (because of a short period due to a transaction or accounting period change) may be able to supersede or amend their return to make an automatic accounting method change for that year.
Final Year of Trade or Business
Rev. Proc. 2024-23 as modified by Rev. Proc. 2024-34 also extends the modification of the eligibility rule under section 5.01(1)(d) of Rev. Proc. 2015-13 and now permits taxpayers that are in the final year of their trade or business to use the automatic procedures to change to the required accounting method for SREs for any taxable year beginning in 2024, as prior guidance did for taxable years beginning in 2022 and 2023.
BDO Insight
The extension of the waivers of the normal restrictions precluding an automatic change if the same item was changed in the previous five years or if a taxpayer was in the final year of its trade or business provided by Rev. Proc. 2025-8 should be welcome news for taxpayers. Taxpayers that had already identified refinements they wished to make in their method of accounting for SREs, or who wished to comply with sections 3 through 7 of Notice 2023-63 (the interim guidance issued by the IRS in September 2023) would have had to file non-automatic accounting method change requests but can now take advantage of the more streamlined automatic method change procedures for taxable years beginning in 2024.
Audit Protection May Be Available
Rev. Proc. 2025-8 does not extend the prohibition on audit protection from prior guidance. If a taxpayer did not change its method of accounting in an effort to comply with Section 174 for its first taxable year beginning after December 31, 2021, the taxpayer would not receive audit protection for a change made in any taxable year beginning in 2022 or 2023. This prohibition has not been extended, so a taxpayer that files an accounting method change for any taxable year beginning in 2024 will receive audit protection, if it otherwise qualifies for it, regardless of whether the taxpayer filed a change to comply with Section 174 for its first taxable year beginning after December 31, 2021.
Non-Automatic Accounting Method Changes Already Filed for 2024
A taxpayer that already filed a non-automatic accounting method change for its taxable year beginning in 2024 that is pending with the IRS national office on December 17, 2024, and that is now eligible to use the automatic accounting method change procedures as a result of the modifications made by Rev. Proc. 2025-8, may convert that change to an automatic change. The taxpayer must notify the national office of its intent to make the change under the automatic procedures before the later of (i) January 17, 2025,or (ii) the issuance of the letter ruling granting or denying consent for the change. The IRS will return the taxpayer’s user fee submitted with the non-automatic request if a taxpayer converts the request to the automatic change procedures. See section 5.02 of Rev. Proc. 2025-8 for further information on converting a non-automatic accounting method change.
Effective Date
The revised procedures provided under Rev. Proc. 2025-8 are effective for Forms 3115 filed on or after December 17, 2024, the date the guidance was released.
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