2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

the increased tax liability caused by IRC Section 174 capitalization. Although there have been three proposals to rescind the Section 174 capitalization requirement in 2023, as of this publishing date, Section 174 has not been revoked. Please consult your tax advisor regarding the 2023 impact of Section 174 capitalization. A. R&D Credit and IRC Section 280C The TCJA changed the expense adjustment relating to the R&D credit. For tax years beginning before January 1, 2022, this code section disallowed a deduction for the portion of Qualified Research Expenses (eligible for the credit) equal to the amount of research credit claimed. The code section allowed a taxpayer to elect to reduce the credit (by 21%) in lieu of reducing the deduction. For tax years beginning on or after January 1, 2022, revised IRC Section 280C(c) provides that if the R&D credit exceeds the amount allowable as a deduction for qualified research expenses or basic research expenses, the amount chargeable to capital account (as IRC Section 174 SREE) shall be reduced by the amount of such excess. There is ambiguity in the revisions to IRC Section 280C in that it does

not address the need to make any adjustment to expense (or, under current law, the amount chargeable to the capital account) where the credit does not exceed the amount allowable as a deduction. Additionally, where a reduction is required, the amount of the reduction is not necessarily the entire amount of the credit but only the excess of the credit over the amount allowed as a deduction. Further complicating the revisions to IRC Section 280C under TCJA is that the IRS may disagree with the revision. The most recently published instructions for Form 6765 (Credit for Increasing Research Activities), Line 17, dated January 2023, provides that if a taxpayer does not elect the reduced credit under IRC Section 280C, it must reduce its otherwise allowable deduction of qualified research expenses by the amount of the credit. The instructions further provide that if the credit exceeds the amount allowable as a deduction for the tax year, then the excess reduces the amount chargeable to the capital account for the year. The Form 6765 instruction does not appear to follow the statutory language within IRC Section 280C, as revised by TCJA. Taxpayers should consult with their tax service providers regarding any legislative

updates regarding IRC Section 280C and advisement regarding the tax effect and tax risks associated with the IRC Section 280C election until further guidance is released. OTHER IRS RELEASES A. Chief Counsel Memorandum (CCM) Impact on Amended Returns On October 15, 2021, the IRS issued CCM 20214101F, providing new guidelines that clarify procedural instructions for eligible taxpayers to claim the R&D tax credit while reducing the number of disputes over such claims. The CCM identifies the information a taxpayer must include in an administrative claim for refund of credit (“refund claim”) for the refund claim to be valid under IRC Treasury Regulation Section 301.6402-2(b)(1). The IRS has provided a transition period through January 10, 2024, giving taxpayers 45 days to “perfect” an insufficient claim before the IRS makes a final determination if all the requested information has been provided. A valid claim only means a taxpayer provided the requested documents in the CCM. The validity of a claim does not preclude the IRS from denying the request or auditing the credit claim.