An Urgent Plea to the SBIR Community re: IRS Notice 2023-63
When the IRS issues preliminary regulations and asks for comments and not enough people respond, it’s not a leap of faith for the IRS to assume that the regulations are good as written. Trust me, this is NOT the case!
If we can get 1,000 companies to leave a short commentary on how these regulations will affect/bankrupt them, maybe the IRS will hear us.
WHAT IRS NOTICE 2023-63 MEANS TO YOU
If you haven’t heard, IRS Notice 2023-63 calls for all government-funded R&D companies to capitalize and amortize their R&D expenses over 5 years, (with a 50% deduction in year 1) instead of deducting the full expense amount in the year it was incurred. So:
|Tax deductible portion in year one||$100,000 ($1M/5 yrs. x 50%)|
|Federal (21%) and State (9%) Income Tax||$270,000|
While legislative relief MAY happen, we wouldn’t count on anything until after the next presidential election… Someone else isn’t going to save you. You need to step up and become part of our VOICE. As I write this plea to the SBIR community, there are only 129 comments, so either you don’t know, think someone else is going to fix this, or have other sources of funding to pay for your corporate income taxes.
IRS NOTICE 2023-63 COMMENT RECOMMENDATIONS
In my honest opinion, being anonymous is not as effective as leaving a personal, real comment. We’d recommend something like this:
- Intro – Who your company is, what you do, how your company might make the world a better place if you succeed.
- What will happen to your company if the IRS proposed regs become final and you are forced to pay ~30% of your REVENUE in federal and state income taxes? Provide a numerical example of the financial situation this creates for you, emphasizing the immediate impact on cash flow.
- Will you be forced to go out of business? Will you be forced to change your business model significantly? Plans for hiring, growth, etc.?
- The changes you’d like to see in the IRS’ final regulations – please feel free to use the bullets below in your own words so it’s clear you are not filling out a form letter:
- The courts have held that section 174 “in connection with” language allows a taxpayer to deduct R&E expenses prior to the actual commencement of a trade or business, while under section 162 a taxpayer must be “carrying on”, or already be engaged in, a trade or business.
- You operate your government-funded R&D businesses with continuity, regularity, and with the primary purpose of making a profit and therefore, believe you should be deducting your non-IR&D expenses under section 162, and not subject to section 174.
- You believe that the IRS’ interpretation of section 174 found in IRS notice 2023-63 strays from the intention of the law, which was to help start-ups and companies performing internally funded IR&D get these costs on the books. It never impacted contract researchers or other businesses performing research for profit. These expenses were always allowed as ordinary and necessary.
- This interpretation strays from the Congressional intent of Section 41, which says that expenses applied to the R&D credit “may” be recorded under Section 174. It does not require that these expenses “must” be recorded under Section 174 because Congress understood that taxpayers performing research for profit could record the costs in sections other than Section 174. Requiring total conformity between Section 174 and Section 41 effectively rewrites both laws.
- Do not accept any of the “solutions” the IRS has offered. For the above reasons, the guidance is too far removed from the law and court rulings to be fixed with a minor change. The IRS does not have constitutional authority to enforce total conformity between Sections 41 and 174.
- Finally, urge Secretary Yellen to re-examine this Notice immediately and provide a common sense understanding of funded research needing both rights to exploit and financial risk in order to be subject to Section 174.
Please do not delay. The comment window closes on November 24 – the day after Thanksgiving. Click the blue “comment” button in the upper left corner of this URL to leave your comment at Regulations.gov
Thank You and Happy Thanksgiving to All,
Ed Jameson, CPA
Ed Jameson, CPA, Managing Member
With over 40 years of experience as a government funding award accounting specialist, Ed is a recognized national expert in the field. In addition to helping hundreds of clients navigate FAR Part 31 compliance. he has been an active speaker and panel moderator at Tech Connect's National SRIR/STTR conferences since 2011. presents at the DOD's Mentor Protégé Summit and presents regularly for several state and local organizations.