The IRS released Notice 2024-12 (released December 22, 2023) to clarify a previous notice and provide guidance on the Amortization of Specified Research or Experimental Expenditures under Section 174. Simultaneously, the IRS released Revenue Procedure 2024-9, providing modified and new procedures for changing accounting methods for the capitalization and amortization of research or experimental expenses (SRE expenses), including SRE expenses allocable to section 460 long-term contracts.

The previous notice, Notice 2023-63, was released in late 2023 and provided proposed, interim guidance under the new section 174 rules that require capitalization and amortization of SRE expenses.

Notice 2024-12

• Removes the requirement that a taxpayer must apply all of the proposed rules in Notice 2023-63 in order to rely on any of the rules in the notice. This means taxpayers may now choose to rely on only the proposed rules (in Notice 2023-63, as modified by Notice 2024-12) that benefit it;
• Clarifies the proposed rules to determine whether a research provider under a research contract has SRE expenses, by providing that if the research provider does not bear financial risk under the contract but obtains a right to exploit or otherwise use the resulting SRE product, the research provider does not have to treat its research service costs as SRE expenses as long as the obtained right qualifies as an “excluded SRE product right.” Notice 2024-12 provides that an excluded SRE product right is a right that is separately bargained for and that arises from consideration other than the cost paid or incurred by the research provider to perform the SRE activities under the research contract.
• Clarifies that rules allowing for current deduction of software development costs, as provided in Rev. Proc. 2000-50, are obsolete for costs paid or incurred in tax years beginning after Dec. 31, 2021, but remain in effect for costs paid or incurred in earlier periods.

Revenue Procedure 2024-9

• Section 3 modifies the previous Revenue Procedure 2023-24 to allow taxpayers to obtain automatic consent to change their method of accounting and rely on interim guidance under Sections 3 through 8 of Notice 2023-63;
• Clarifies Section 9.01(1) and (3) of Revenue Procedure 2023-24, making it consistent with Section 12 of Notice 2023-63. This provides alternative methods of accounting for software development costs.
• Provides a new, automatic method change for SREs allocable to long-term contracts accounted for under the percentage of completion method (PCM). The change also allows taxpayers to choose to include either the entire amount of allocable SRE expenses in the denominator of the completion factor or only the portion that will be amortized during the contract term.

Overall, this clarification and guidance is generally good news for taxpayers. The ability to select which, if any, provisions of Notice 2023-63, as modified by Notice 2024-12, to apply is particularly advantageous.

Additionally, the IRS and Treasury still plan to issue proposed regulations providing more substantive guidance under section 174. It is anticipated that these regulations will be issued sometime in late Spring and may impact taxpayers’ treatment of SRE expenses further.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

The IRS recently released their proposed changes to the Form 6765, Credit for Increasing Research Activities. The form is used by taxpayers to claim the research and development tax credit.

By unveiling the new version of the form, the company is hoping to gain feedback from stakeholders in advance of the formal draft release process for form changes. Some of the proposed changes address previous feedback the agency received from taxpayers and tax professionals, said the IRS, which added that it would like to make the changes effective beginning with tax year 2024.

Ultimately, their goal is to provide a uniform, consistent, and predefined format for taxpayers to streamline the process of reporting details about the tax credit. Not only will this provide clearer guidance for taxpayers, it will help the IRS to manage research credit issues and resources in the most effective and efficient manner possible.

The proposed changes to Form 6765 include:

• A new Section E with five questions seeking miscellaneous information.
• A new Section F for reporting quantitative and qualitative information for each business component, required under Section 41 of the Internal Revenue Code.
• Moving the “reduced credit” election question and the “controlled groups or businesses under common control” question from line 17 and line 34 to the top of Form 6765.

The IRS is also requesting feedback on whether Section F should be optional for certain taxpayers, including those:

• With qualified research expenditures less than a certain dollar amount at a controlled group level;
• With an R&D credit less than a certain dollar amount at a controlled group level; or
• That are a qualified small business for the payroll tax credit.

Feedback for each suggestion should address the justification, limitation amounts, and pros and cons, the IRS said.

If Section F were optional for certain taxpayers, the IRS said it would not affect the requirement to maintain books and records and to provide Section F information in similar format, if requested. Also, it would not apply to amended returns for the R&D credit.

All feedback on the proposed form changes, potential Section F options, and all other questions should be submitted to Lbi.rt.team@irs.gov with the subject line: “Feedback/Questions F6765.” All feedback is requested by Oct. 31 and will be considered before the IRS finalizes any Form 6765 changes, the agency said.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

With the Inflation Reduction Act of 2022 officially signed into law by President Biden, it’s time to look into the impacts of the act on the R&D tax credit. The legislation was drafted with a focus on government spending programs designed to impact climate change but a variety of tax provisions were contained as well.

The act increases the maximum amount a qualified small business can elect to claim as a payroll tax credit from $250,000 to $500,000 beginning after Dec. 31, 2022. While this may seem like a great move for these small businesses, it’s likely that very few will see any change in their credit. This is simply because of the way the credit is calculated.

The tax credit is calculated based on the amount of R&D spent by the company and most early-stage startups do not spend enough to capture $250,000 worth of a credit in the first place. On the bright side, there is no downside to this increase in the maximized credit limit. All companies eligible for the credit remain eligible and those who have been limited by the cap out in the past will only benefit. With this in mind, the Act doesn’t really double the R&D tax credit for most startups, but could still be a welcome benefit for some.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

According to IC Insights’ updated review and analysis of global data, the Americas – and specifically the United States – remain the globe’s biggest investors into semiconductor R&D. 

In 2021, the Americas led with their 55.8% slice of the total $80.5 billion sunk into technological research and development. But the data shows that Asia-Pacific countries have been increasing their spending at a much more radical pace, leading them to gain 11.5% of the pie. It would seem this market too is approaching a duopoly, setting trends for decades to come.

The United States Senate has recently advanced a $280 billion bill designed to further boost the semiconductor industry. This bill is meant to accelerate high tech research that will be critical to the economy in future decades. A bill like this would only support their leading position in the global race.

The Senate needed 60 votes to advance the bill and with a vote of 64-32, the legislation is now on track to final passage in the Senate. The White House has led support for the bill along with other industry leaders. These leaders have identified that government subsidies are crucial to maintaining this global lead. They say the pandemic has exposed the dangers to the economy and to national security of relying too heavily on foreign-made computer chips.

The bill would provide $42 billion in grants and other incentives for the semiconductor industry as well as a 25% tax credit for those companies that build chip plants, or fabs, in the U.S. The cost of the tax break is projected to be about $24 billion over 10 years. The bill also authorizes about $200 billion to enhance scientific research over the same timeframe.

“We are not used to providing these kinds of financial incentives to businesses, but when it costs 30 percent less to build these manufacturing facilities across the seas in Asia and our access to that supply chain is potentially jeopardized by very real threats, it is a necessary investment for us to make,” said Sen. John Cornyn, R-Texas.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

The Texas Comptroller of Public Accounts has been working on amendments to its franchise tax rule, 34 Tex. Admin. Code Section 3.599. These amendments were filed with the Secretary of State on October 4, 2021 and published October 15, 2021. These amendments will retroactively apply to Texas franchise tax reports due on or after January 1, 2014.

These amendments focus on Research and Development (R&D) Tax Credit. Further amendments affect the R&D exemption under its sales and use tax rule, 34 Tex. Admin Code Section 3.340.

Franchise Tax Rule, 34 Tex. Admin. Code Section 3.599

The Texas Comptroller changed the proposed text for both rules published in the Texas Register on April 16, 2021. These changes include:

• Incorporating the four-part test from the federal research credit articulated in IRC Section 41(d)
• Amending the definition of “qualified research expense” (QRE) to mean the sum of all in-house research and contract research expenses
• Clarifying that the applicable reference to the IRC for R&D credit purposes is the IRC in effect as of December 31, 2011, and specifying that any federal regulation adopted after this date is only included in this term to the extent a taxpayer must apply that regulation in the 2011 tax year
• Listing activities that do not constitute qualified research activities (QRA) (such as “internal use software”)
• Clarifying that tangible personal property will not qualify as a research expense for purposes of the TX R&D credit if the taxpayer claimed a manufacturing or resale sales tax exemption when purchasing that property
• Modifying credit eligibility requirements
• Providing guidance to Texas franchise tax combined groups claiming the Texas R&D credit

Four Part Test

This test is used in the federal R&D tax credit to outline the basic requirement for research activities to be qualified research. The first part outlines the Business Component Test while the last outlines the Process of Experimentation Test. 

The amended Business Component Test explicitly states that business component’s do not include a service provided to a customer or a design.

The amended Process of Experimentation Test identifies “non-experimental methods” such as trial and error. In doing so, they expand on factors the Texas Comptroller may consider in determining whether a trial-an-error method is experimental or non-experimental in a modified subsection 3.599(c)(1)(D)(vi). Ultimately this is a non-exhaustive list and not all factors need to be checked. The amendments go further to include that, in some cases, computer-aided simulation and modeling may be considered an experimental process.

Software

These modifications also include much more insight into the role of software in R&D – a long standing question for those in the industry. For instance, the addition of a non-exclusive list indicates which software development activities are likely and unlikely to constitute qualified research.

Excluded Research Activities

Modifications included a list of activities that are not qualified. This list is based on the federal regulations in IRC Section 41(d)(4) and Treas. Reg. Sections 1.41-4(c) and 1.41-4A(d) (specifically related to the funded research exclusion). While most of these exclusions emulate the federal rules, internal use software is a notable exception. The final rules define internal use software as computer software developed for use in the operation of the business, rather than basing the definition on the federal regulations. 

Excluded activities as described in the final rule include:

• Research after commercial production of the business component
• Adaptation of existing business components
• Duplication of existing business components
• Surveys, studies, market research, etc.
• Internal use computer software
• Social sciences, arts or humanities
• Research funded by a grant, contract or by another person or governmental entity

Credit Eligibility Requirements

As with all other aspects of this credit, the burden of proof is on the taxpayer. This includes  the burden of establishing their entitlement to and value of the credit using clear and concise evidence. The definition and expectation for contemporaneous documentation differs from the federal R&D credit, following the standards used in all other Texas franchise tax credits instead. The final rule requires

1. All QREs to be paid or incurred in connection with QRAs
2. All QREs to be supported by contemporaneous business records

Other Changes

A proposed change to the provisions on the impact of combined reporting on the R&D credit in Section 3.599(i). This initial proposal was significantly modified before being finalized. The now final rule clarifies that the combined group is the taxable entity for purposes of combined reporting, and requires the total qualified research expense of each member of the combined group to be added together to determine the total credit claimed on the combined report. In contrast, the proposed amendments would have required each member of a combined group to determine its credit as if it were an individual taxable entity and then add together the total credits for each entity to determine the credit claimed on the combined report.

If the members of this combined group change, the new group is seen as a new taxable entity. This means the new entity cannot carry forward the previous R&D credit. 

Summary

There remain several important differences between the federal IRC Section 41 rules and the final Texas R&D rules, which mean taxpayers may require separate federal and Texas R&D credit calculations – even when all QRAs are performed in Texas. This increases the complexity of the filing, the cost associated for compliance, and the burden associated with storing and keeping of relevant records.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.