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AICPA Asks IRS, Treasury for Immediate Guidance on Domestic Research Costs in the OBBA

On Jul. 31, the AICPA sent a letter to both the IRS and Treasury on the recently enacted section 174A related to domestic research and experimental expenditures in the One Big Beautiful Bill Act.

AICPA is suggesting that both agencies give immediate guidance to allow eligible small business taxpayers to immediately deduct, on their 2024 originally filed income tax returns, domestic research costs that were paid or incurred in taxable years starting in 2024.

According to AICPA's letter, a lot of eligible taxpayers have not filed their income tax returns for the 2024 income tax filing period. It is not clear if they are allowed to deduct 2024 domestic research costs on their 2024 originally filed federal income tax returns, instead of being able capitalize on the amounts on an originally filed return with the intent to file amended 2024 returns to deduct such costs.

The language of the Act allows eligible taxpayers to make an election to substitute the effective dates of Section 70302 and to treat the election as a change in accounting method for the first taxable year impacted by the election, the letter stated. But making the election seems to bind an eligible taxpayer to amend returns unless an election to treat as a change in method of accounting is concurrently made.

The AICPA made various recommendation for the IRS and the Treasury to make it easier on taxpayers to account for these research expenditures.

The AICPA recommended issuing  guidance stating that an eligible taxpayer that deducts 2024 domestic research costs on its 2024 federal income tax return. This guidance should state that notwithstanding the deemed election on the 2024 federal income tax return, these taxpayers could amend its 2022 and 2023 federal income tax returns for domestic research costs paid or incurred in taxable years starting in 2022 and 2023, to apply Section 70302 of the Act retroactively. The could also elect to file a change in method of accounting for its first taxable year starting after Dec. 31, 2024.

The guidance should also state that if an eligible taxpayer makes the aforementioned election but has a net operating loss (NOL) for any taxable year impacted by the election, then in lieu of amending the NOL year return the taxpayer is allowed to adjust in the NOL carryforward year(s) with a note that the NOL has been adjusted to reflect the election.

These suggestions lets eligible taxpayers avoid unintended consequences if they deduct domestic research costs on their 2024 original income tax returns. "Providing timely guidance that allows eligible taxpayers the ability to deduct their 2024 domestic research costs while preserving the ability to recover domestic research costs paid or incurred in taxable years

beginning in 2022 and 2023 in accordance with the transition rules in subsection (f)(1) of Section 70302 of the Act would provide the benefit of sound tax administration for impacted taxpayers, practitioners, and the IRS," the AICPA said.

The guidance will also allow immediate tax relief to these eligible taxpayers and offer relief to taxpayers that inadvertently deducted 2024 domestic research costs on their 2024 federal income tax returns and fear such deduction might place in jeopardy chance to treat the retroactivity election in the Act as a change in accounting method, the letter stated.