AICPA seeks guidance on Sec. 174A(c) capitalization and amortization of R&E

The IRS should issue guidance regarding the capitalization and amortization of domestic research and experimental (R&E) expenditures through modifications to Rev. Proc. 2025-28 or other published guidance, the AICPA recommended in a letter to Treasury, dated Feb. 19.

The AICPA recommended that the IRS:

• Issue guidance specifying that the capitalization and amortization election under Sec. 174A(c) is an election applied on a project-by-project basis for domestic R&E paid or incurred in the tax year of the election and subsequent tax years, consistent with Sec. 174 and Regs. Sec. 1.174-4 prior to 2017’s Tax Cuts and Jobs Act, P.L. 115-97.

• Give taxpayers the option to treat the election under Sec. 174A(c) as a yearly election applied to domestic R&E paid or incurred in the tax year of election only.

“The project-by-project approach would comply with the [Code] and be consistent with how it has been interpreted for over 60 years,” the letter said. A yearly election method also could comply with the Code and would “be welcomed by taxpayers,” the letter said.

The AICPA also recommended that the IRS:

• Issue guidance, perhaps as a safe harbor, providing a simplified methodology of determining the month in which the taxpayer first realizes benefits from the domestic R&E based on the assumption that the month in which the taxpayer first realizes benefits is the midpoint of the tax year in which such expenditures are paid or incurred. Doing so “would help avoid unnecessary disputes and burdensome analysis,” the letter said.

• Issue guidance providing that an election to capitalize and amortize domestic R&E under Sec. 174A(c) is a method of accounting with respect to the specified domestic R&E paid or incurred during the tax year of the election subject to the election, consistent with Sec. 174 and Regs. Sec. 1.174-4 prior to the TCJA.

Starting in 2022, the TCJA required businesses to capitalize R&E costs and amortize them over five years for domestic research or 15 years for foreign research. H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act, restored the option to immediately deduct domestic R&E expenses, effective for tax years beginning after Dec. 31, 2024.

Conflicting language in Section 6 of Rev. Proc. 2025-28 “has led to varying interpretations of the election under Sec. 174A(c) as being either a method of accounting or a taxable year election,” Reema Patel, CPA, senior manager–Tax Policy & Advocacy for the AICPA, said in a news release.

But allowing the election under Sec. 174A(c) on either a project-by-project basis or on a tax-year basis “will appropriately balance flexibility with administrability,” Patel said. “Tax practitioners also need clarification on the guidance as they prepare their tax returns.”

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.