IRS broadens SRE method changes in advantageous guidance

The IRS issued favorable guidance (Rev. Proc. 2024-34) that broadens the scope of the automatic method change procedures (Rev. Proc. 2024-23) for the treatment of specified research or experimental (SRE) expenditures under Section 174 for taxpayers with short taxable years in 2022 and 2023.

Rev. Proc. 2024-34 modifies procedures in Section 7.01 of Rev. Proc. 2024-23 by expanding certain taxpayer-favorable automatic consent rules to apply to any taxable year beginning in 2022 and 2023. Under prior guidance, these rules were only applicable for a taxpayer’s first or second taxable year beginning after Dec. 31, 2021.

The new procedures do the following:

Extend the waiver of the eligibility rules in Sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 to taxable years beginning in 2022 and 2023
Provide that taxpayers may make a change in successive taxable years beginning in 2022 or 2023 for the same item

Similar to the taxpayer favorable rules under prior guidance, the new procedures provide limited audit protection with respect to SRE expenditures paid or incurred in the first taxable year beginning after Dec. 31, 2021, and expand the rules to include taxable years beginning in 2022 or 2023. Generally, taxpayers receive audit protection for changes made for any taxable year beginning in 2022 or 2023, provided the taxpayer changed its method in an effort to comply with Section 174 for its first taxable year beginning after Dec. 31, 2021.

The new procedures are effective for Forms 3115 filed on or after Aug. 29, 2024.

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Grant Thornton Insight:

The issuance of Rev. Proc. 2024-34 offers administrative relief by permitting taxpayers with multiple short tax years in 2022 or 2023 to file an automatic method change for SRE expenditures during 2022 or 2023. For example, under prior guidance, a taxpayer with two short years in 2022 was unable to file an automatic method change for SRE expenditures in 2023. Under the guidance provided in Rev. Proc. 2024-34, such a taxpayer may file an automatic method change for SRE expenditures in 2023.

Contacts:

Sharon Kay

Principal, Washington National Tax Office
Principal, Grant Thornton Advisors LLC

Sharon Kay is a subject matter specialist in Grant Thornton’s Washington National Tax Office with 20 years of tax experience. She primarily advises clients on federal income tax issues such as tangible and intangible asset capitalization and recovery, inventories, income and expense recognition, and certain business credits.

Washington DC, Washington DC

+1 202 861 4140

Service Experience

Strategic federal tax
Tax

Dennis St. Martin

Senior Manager

Washington, D.C.

+1 202 521 1562

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