H.R. 7024, the "Tax Relief for American Families and Workers Act of 2024" (H.R. 7024, the bill), which is currently under consideration in the US Senate after being passed by the US House of Representatives, has raised questions for many taxpayers on the deductibility or capitalization of domestic research and experimental expenditures. The following questions and answers (Q&A) address some of the common concerns taxpayers may have if the bill is enacted. For more information on H.R. 7024, see Tax Alert 2024-0403.

Q1. Could I amend my 2022 tax return to deduct my domestic research or experimental expenditures?

A1. Most likely. Although the bill would not explicitly permit taxpayers to amend their returns to deduct domestic research or experimental expenditures, it would allow taxpayers to amend returns to make certain late elections and revocations, some of which are only possible if a taxpayer can amend its return to treat its domestic research or experimental expenditures as deductible under the new provisions. Taxpayers, however, could not amend returns to deduct foreign research or experimental expenditures; the provisions of IRC Section 174, as amended by the Tax Cuts and Jobs Act (TCJA), would remain in place for foreign research or experimental expenditures.

Q2. If I amend my 2022 return to deduct my domestic research and experimental expenditures for that year, could I also make a late election under IRC Section 59(e) to amortize those costs?

A2. Yes, the rules would allow a late IRC Section 59(e) election for domestic research or experimental expenditures, under certain circumstances.

Q3. What if I want to continue to capitalize my research or experimental expenditures for 2022?

A3. The rules would allow taxpayers to (1) make late elections under the new IRC Section 174A to capitalize and amortize domestic research or experimental expenses over no less than 60 months (beginning when a taxpayer first realizes benefits) or (2) charge domestic research or experimental expenditures to a capital account (no cost recovery method is identified). The optional elections to capitalize would only be available for domestic research or experimental expenditures, as the provisions of TCJA IRC Section 174 remain in place and require capitalization for foreign research or experimental expenditures.

Q4. What would the IRC Section 280C implications be for amended 2022 returns?

A4. A taxpayer that elected in 2022 to take a reduced credit under IRC Section 280C(c)(2) (as amended by the TCJA) could revoke its election under certain circumstances. This revocation could restore 21% of the 2022 credit. A taxpayer that did not elect to take a reduced credit under IRC Section 280C(c)(2) would not need to take any action, although the bill would permit late elections under certain circumstances. The bill's amendments to the text of IRC Section 280C would not be effective until 2023.

Taxpayers should consider how the administrative procedures described in Field Advice 20214101F (Sept. 17, 2021) would apply if the revocation of their 2022 IRC Section 280C reduced-credit election would result in a research credit refund.

Q5. Do I have to amend my 2022 return?

A5. No; certain taxpayers could elect to treat the change in law as a change in accounting method in their 2023 tax year with a modified IRC Section 481(a) adjustment that takes into account only domestic research or experimental expenditures paid or incurred in 2022 and not deductible in 2022. The rules would allow taxpayers to choose to take the amount of the change into account over two tax years.

Q6. Could I go back to treating my software development costs under Section 5 of Revenue Procedure 2000-50 or make changes under Section 9 of Revenue Procedure 2023-24 for software development costs?

Q6. No; IRC Section 174A would include a special rule that would treat software development costs as research or experimental costs (identical to the rule in TCJA IRC Section 174). Furthermore, the Treasury and IRS recently made Section 5 of Revenue Procedure 2000-50 obsolete for software development costs paid or incurred after December 31, 2021 (see Notice 2024-12 and Revenue Procedure 2024-9).

Q7. What if I have filed returns for more than one tax year before the bill is enacted?

A7. Taxpayers with multiple short tax years may face complications in implementing the retroactive application of the new law.

Q8. How would the bill's retroactive changes to the treatment of domestic research or experimental expenditures affect other code provisions?

A8. If and how the retroactive changes to the treatment of domestic research or experimental expenditures affect other Code provisions (such as foreign-derived intangible income, global intangible low-taxed income, IRC Section 163(j), and the base erosion anti-abuse tax) would depend on whether the taxpayer amends its 2022 return or elects a method change to implement the new provisions. It also would depend on whether the taxpayer, for 2022–2025, chooses to deduct domestic research or experimental expenditures or elects to treat them as capitalizable, and (for deductible domestic research or experimental expenditures) whether it elects to amortize those costs under IRC Section 59(e). Taxpayers should consider carefully modeling the various accounting treatment options and timing of implementation to assess the outcomes.

Q9. How would the retroactive application of the rules affect my state income tax returns for 2022 and for tax years 2023–2025?

A9. Depending on whether a state adopts the IRC, the retroactive application of the rules could affect state income tax returns for 2022 if a taxpayer amends its federal return to apply the rules retroactively or make certain late elections/revocations. A taxpayer that treats the change in law as a change in method of accounting may have less of a state compliance burden but will need to assess how the state law adopts (or does not adopt) changes made by the bill.

Q10. Am I eligible to make elections, late elections and revocations on an amended return or treat the change in law as a change in method of accounting?

A10. The bill would limit the availability of certain late elections, so taxpayers should carefully review whether they are eligible under those provisions. Taxpayers would have a limited time to make a late election under IRC Section 59(e), a late election (or revocation of an election) under IRC Section 280C(c)(2), or late elections to capitalize domestic research or experimental costs under IRC Sections 174(c) or (d), as they would have to make those elections on an amended return (for their first tax year beginning after December 31, 2021) during the one-year period beginning on the date of enactment. Additionally, a taxpayer would have to meet certain criteria to elect to treat the change in law as a change in method of accounting.