R&D Tax Credit News

The recent release of Notice 2023-63 has sent ripples across the corporate sector. Issued on Friday, September 8, 2023, it provides much-needed clarity on a slew of questions, especially those centered around Section 174 pertaining to research and experimental expenditures.

Below, we delve into the primary issues addressed by the notice:

1. Contract Researcher Arrangements:

The notice sheds light on contract researcher arrangements. If a contractor performs research and doesn’t bear the financial risk and rights pertaining to a project, the related costs are not subject to 174 amortization for the contractor.

2. Software Development:

Software development has often been a gray area, and this notice offers some clarity for expenditures subject to 174 amortization, and those that do not constitute software development. Activities related to data conversion, installation configuration of purchased software, and maintenance activities and training need not be included under Section 174. Activities mentioned as software development for 174 purposes include planning the development, designing the software, building a model, and testing the software.

3. Inclusions Under 174:

The notice enumerates specific expenditures that both fall under Section 174, and examples of costs that are not required to be treated as specified research expenditures. For example, some of the costs subject to 174 in this list include certain operation and management costs for facilities (such as rent, utilities, insurance) used in the performance of research, travel costs and payroll taxes related to employees performing research activities. Some of the types of costs specifically excluded from 174 include G&A department costs, such as payroll, accounting, and human resources, costs to input content onto a website, and website hosting costs.

4.  Midpoint Calculation:

For businesses operating in a short tax year, Notice 2023-63 offers clarity on the midpoint calculation. The notice defines “midpoint” for short tax years as the first day of the midpoint month. The amortization deduction is based on the number of months in the short tax year.

5. Property Disposal:

The notice clarifies the rules pertaining to the treatment of 174 expenditures if the taxpayer has a disposition, retirement, or abandonment of property. Depending on the type of transaction, if the corporation ceases to exist, in some cases the acquiring corporation will continue to amortize the expenses. In others, they may be deducted in the final tax year.

For companies, understanding these proposed changes and nuances is paramount. It’s heartening to note, however, that these guidelines won’t retroactively affect any returns, either already filed or in the process of filing. They will only be applicable for tax years ending post-September 8, 2023.

Furthermore, it’s evident that the authorities are keen on fostering an open dialogue with taxpayers. They’ve put out a call for comments and have even suggested specific issues they’d like insights on before they issue the proposed regulations. This open invitation lasts until November 24, 2023.

In Closing:

As the corporate sector continues to grapple and evolve with tax codes and guidelines, it’s indispensable to remain abreast of changes and recalibrate strategies accordingly. At H&K, we’ve always been at the forefront of understanding and implementing tax guidelines, ensuring our clients remain compliant and well-informed.

Stay tuned for detailed information elucidating the qualifications and intricacies of Notice 2023-63. As always, our goal is to simplify the complexities of the financial landscape for you.