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IRS releases guidance on Section 174 and draft Form 6765

Oct 06, 2023

The IRS has provided new guidance on Section 174 expenditures and released proposed research and development credit form updates.

Notice 2023-63 helps provide interim guidance on the amortization and capitalization of specified research or experimental (SRE) expenditures before the release of regulations for Section 174. And IR-2023-173 was released to solicit feedback on proposed changes to Form 6765.

Both releases may impact how you track and account for research costs.

Notice 2023-63

On Friday, September 8, 2023, the IRS released Notice 2023-63 to announce that they intend to issue proposed regulations on Section 174. In the meantime, this notice stands as the interim guidance and is applicable for tax years ending after September 8, 2023.

The notice includes a non-exhaustive list of the type of costs, examples and allocation methods that taxpayers are required to comply with when determining the amount of SRE expenditures under Section 174. Additionally, the guidance provides further distinction on the identification of SRE expenditures related to:

  • Software development
  • Costs under contract
  • Long-term contracts/percentage of completion
  • Cost-sharing arrangements
  • Directives related to disposition

The IRS has requested general public comment, including on specific topics of issue that the IRS is seeking opinions on. The notice requests comments be submitted to the IRS by November 24, 2023.

IR-2023-173

On Friday, September 15, 2023, the IRS released IR-2023-173, a list of proposed changes to Form 6765, which is used to claim federal research and development tax credits.

The proposed changes are anticipated to be applicable for the tax year 2024. The suggested changes include checkboxes moved to the top of the form to indicate Section 280C election and control group/common control status.

The proposed changes also add two sections to the end of the form: Section E and Section F. Section E incorporates five new miscellaneous research credit questions and Section F adds a requirement for granular detail supporting the credit claimed, including business component costing and other qualitative information. 

Section F mirrors the previously released Chief Counsel Memorandum guidance, which required submission attachments for taxpayers that file amended tax return refund claims related to research credits.

The IRS has requested general public comment, including opinions regarding under what circumstances Section F should be optional. The IRS has requested comments be submitted by October 31, 2023.

How Wipfli can help

Looking for more information on the research credit or Section 174 expenditure requirements?

Wipfli’s research and development tax credit team can help you navigate the complexities of tax law, including identifying credit opportunities in activities that may not seem research and development oriented. Contact us today to learn more about how we can help you maximize the credits you qualify for.

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Author(s)

Christina Schultz, CPA
Senior Manager, Tax
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