2023 Marcum Year-End Tax Guide

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union should be treated as an instrumentality of the US, and consequently, the ERTC does not apply. However, this exclusion to the credit did not apply to 2021, so a federal credit union could receive the ERTC if it is otherwise a qualified employer paying qualified wages for a quarter of this year. 2. The Service stated that a refund claim for an eligible employer made by a third-party payor, a Professional Employer Organization (PEO), or a Certified Employer Organization (CPEO) can be applied against other taxes due by such filing organization. The refund claim will not be paid directly to the employer. It is a contractual matter between the employer, on whose behalf the refund claim is being made, and the filing organization regarding the receipt of the dollars covered by the claim. SECTION 174 SPECIFIED RESEARCH & EXPERIMENTATION EXPENSES The Tax Cuts and Jobs Act (TCJA) significantly changed the rules involving the deduction for research and experimentation costs under IRC sec 174. Under pre-TCJA regulations, taxpayers could deduct research and experimentation expenses in the year paid or incurred. A taxpayer was allowed to elect to capitalize and amortize the costs over a period not less than 60 months, beginning with the year of its first use.

Alternatively, one could capitalize the cost. Most taxpayers expensed the costs and probably did not distinguish them from the other operating costs on its books. If the costs were capitalized under either of the last two methods described, the taxpayer could apply the cost to determine gain or loss on the sale, exchange, or disposition of the property related to the research. Additionally, a deduction was allowed if the research was abandoned. IRS and the Code treated the capitalized costs as an increase to the basis of related property. To satisfy the budget requirements to pass under the reconciliation process, the TCJA included a significant change in the treatment of “specified research and experimentation expenses” (SREE). For tax years beginning January 1, 2022, and later, a taxpayer is required to capitalize SREE and to amortize it over a designated period (5 years for domestic research and 15 years for foreign research) beginning with the mid-point of the year paid or incurred under new IRC sec 174(a). The current law also states that if property related to research expenses is disposed of, no deduction will be allowed for those expenses, and the amortization will continue. It may have been the expectation of the legislators that this provision would have been changed before it became effective. However, a change to the law has not yet occurred, and we are forced to work with the law as written.

For 2022, the new SREE rule raised several questions about its operation and its interaction with other Code provisions. The Service provided some preliminary guidance in Notice 2023-63, which suggested rules that would be included in upcoming regulations. These regulations would be effective for tax years ending after September 8, 2023, and, consequently, would not apply to most 2022 tax returns. However, the IRS says taxpayers could rely on the guidance provided for years before the effective date. The Service requests comments from interested parties electronically by November 24, 2023, though it will probably consider comments received after that date. It is unclear whether the Notice’s provisions will survive the comment process. Some of the issues addressed in the Notice include: • Can capitalized costs be included in determining the gain on a sale of related property? The argument in favor of this position is that applying basis to bring one’s gain to zero is not a “deduction,” and the statute only bars a deduction on a sale or disposition. The Notice concludes that these costs cannot be applied. However, if the taxpayer is a corporation that is liquidated, the Notice would permit a deduction for the balance of the unamortized SREE costs in certain circumstances. The Notice does not extend this result to a liquidation of a partnership and requests comments on whether the same or different rule should apply.

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