IRS modifies automatic method change to specified research expenses

On Aug. 29, 2024, the IRS issued Rev. Proc. 2024-34 to modify the automatic change procedures for capitalizing section 174 research and experimentation expenditures as outlined in the Tax Cuts and Jobs Act (TCJA) of 2017. The revised procedures offer more flexibility for certain taxpayers with short tax years in 2022 or 2023 to file an automatic accounting method change. The revised procedures are effective immediately.

Key takeaways

• Immediate impact: Rev. Proc. 2024-34 is effective for automatic accounting method change applications (Form 3115) filed on or after Aug. 29, 2024 (i.e., immediately).
• Softened eligibility rules: Typically, the eligibility rules prohibit filing an automatic method change in the final year of a trade or business or if the same item was changed within the previous five tax years. However, the modified procedures favorably waive these rules for a change filed for any tax year beginning in 2022 or 2023. Thus, a taxpayer may make the change to capitalize specified research and experimental (SRE) expenditures for a taxable year beginning in 2022 or 2023, regardless of whether the taxpayer made a change for the same item for any previous taxable year beginning in 2022 or 2023.
• Expanded waiver availability: Previously, the waiver was available only for a change made for the first or second tax year beginning after Dec. 31, 2021. This left taxpayers with short tax years in 2022 or 2023 unable to make the change automatically. The new procedures remove this restriction simplifying the process for these taxpayers to meet section 174 requirements.
• Action required: Taxpayers that need to file SRE method changes for 2023 to comply with section 174 research and experimentation (R&E) expense capitalization should