2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

KEY CONSIDERATIONS FOR 2024 CORPORATE TAX PLANNING, INCLUDING CAPITALIZING TECHNOLOGY EXPENDITURES, AND THE IRS’ USE OF ARTIFICIAL INTELLIGENCE BY PAM KAHLON Whether taxpayers are having a good year, rebounding from recent losses, or still struggling to get off the ground, tax planning is an integral part of any corporation’s overall business planning.

CAPITALIZATION OF SPECIFIED RESEARCH OR EXPERIMENTATION (SRE) COSTS With the amendment of IRC Section 174 as part of the Tax Cuts and Jobs Act (TCJA) of 2017, calendar year 2022 was the first year many taxpayers found themselves capitalizing significant amounts of specified research and experimental expenditures with little guidance from the IRS. Finally, on Sept. 8 of this year, the IRS published Notice 2023-63, providing interim guidance on the capitalization and amortization of SRE expenditures incurred in taxable years beginning after Dec. 31, 2021. The interim guidance addresses many questions while leaving other anticipated questions unaddressed. • Identification and allocation of costs: Examples of costs that are SRE expenditures are provided, including expenses considered incident to research and experimental activities, as well as a non-exhaustive list of costs not treated as SRE expenditures.

• Midpoint amortization: The notice clarifies the definition of midpoint to provide that for full, 12-month taxable years, amortization begins on the first day of the seventh month of the taxable year, and for short taxable years, amortization starts on the first day of the midpoint month. If a short taxable year encompasses a fraction of a month, the entire month counts in the calculation, avoiding double counting the same month. • Software development: Software development is broadly defined in the notice and includes upgrades and enhancements (such as modifications to existing software that add functionality or improve its speed and efficiency). Activities considered as software development for Section 174 purposes include planning, designing, modeling, coding, and testing. • Research performed under contract: The notice provides that the existing rules for treating costs paid or incurred for research conducted under

contract are unchanged. However, the IRS clarifies that costs incurred by the research provider (the party contracting to perform research services or develop an SRE product) are SRE expenditures if the provider assumes financial risk within the contract or possesses the right to use or exploit the resulting SRE product within its trade or business, including through methods such as sale, lease, or licensing. • Disposition, retirement, or abandonment of property: Section 174(d) prohibits a deduction of SRE expenditures due to disposition, retirement, or abandonment; however, the notice provides relief to corporations by stating if a corporation ceases to exist in a transaction or series of transactions not covered by Section 381(a), the corporation is allowed a deduction equal to the unamortized SRE expenditures in its final taxable year. This provision does not apply if the principal purpose of the transaction is to claim a

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