# Bulletin No. 2023–39

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A456b3fa5576740e0

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

HIGHLIGHTS
OF THIS ISSUE




Bulletin No. 2023–39
September 25, 2023

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Notice 2023-63, page 919.

Notice 2023-63 announces the IRS’ intent to issue regulatory
guidance to address issues regarding specified research or
experimental expenditures under § 174. Notice 2023-63
also provides interim guidance regarding these expenditures.
This includes definitions of relevant terms; in addition to rules
for allocation of costs, software development, research provided under contract, disposition of property, long term contracts, and cost-sharing transactions. Finally, Notice 2023-63
requests comments for issues regarding the interim guidance
provided.

Finding Lists begin on page ii.

REG-100908-23, page 931.

The proposed regulations describe the rules for satisfying
the prevailing wage and registered apprenticeship requirements to qualify for increased credit or deduction amounts
under the Internal Revenue Code. In addition, the proposed
regulations provide correction and penalty procedures
for taxpayers to be deemed to satisfy the prevailing wage
and registered apprenticeship requirements. The proposed
regulations also describe recordkeeping and reporting
requirements related to the prevailing wage and registered
apprenticeship requirements.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

September 25, 2023 

Bulletin No. 2023–39

Part III
Guidance on Amortization
of Specified Research or
Experimental Expenditures
under Section 174
Notice 2023-63
SECTION 1. OVERVIEW
This notice announces that the
Department of the Treasury (Treasury
Department) and the Internal Revenue
Service (IRS) intend to issue proposed
regulations (forthcoming proposed regulations) addressing (1) the capitalization
and amortization of specified research or
experimental (SRE) expenditures under
§ 174 of the Internal Revenue Code
(Code)1, as amended by Public Law 11597, 131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and
Jobs Act (TCJA), (2) the treatment of
SRE expenditures under § 460, and (3)
the application of § 482 to cost sharing
arrangements involving SRE expenditures. The Treasury Department and the
IRS intend to propose rules in the forthcoming proposed regulations consistent
with the interim guidance provided in sections 3 through 9 of this notice. Section
10 of this notice provides that taxpayers
may rely on the interim guidance provided
in sections 3 through 9 of this notice prior
to the publication date of the forthcoming proposed regulations in the Federal
Register. Section 11 of this notice requests
comments, including comments on specific issues and issues not addressed in
this notice.
The guidance in this notice does not
apply for purposes of determining whether
an expenditure paid or incurred for taxable years beginning before January 1,
2022, is a research or experimental expenditure under § 174 as in effect for taxable
years beginning before January 1, 2022
(former § 174). This notice provides
guidance regarding expenditures that are
treated as SRE expenditures under § 174
and, therefore, affects expenditures that

1

may be treated as SRE expenditures for
purposes of § 41(d)(1)(A) and § 1.41-4(a)
(2)(i). However, this notice is not intended
to change the rules for determining eligibility for or computation of the research
credit under § 41 and the regulations
thereunder, including rules for “research
with respect to computer software,” and
the definitions of “qualified research” and
“qualified research expenses.”
SECTION 2. BACKGROUND
.01 Prior law treatment of research or
experimental expenditures.
(1) In general. Former § 174 was first
enacted in 1954 to provide certainty to
taxpayers regarding the treatment of otherwise capitalizable research or experimental expenditures with no determinable
useful life. See H.R. Rep. No1337, 83d
Cong., 2d Sess. 28 (1954); S. Rep. No.
1622, 83d Cong., 2d Sess. 33 (1954).
Before the enactment of former § 174,
courts consistently held that the law
required capitalization of product research
and development costs, including production costs of tangible property used
in the research process. Under such prior
law, expenditures related to a taxpayer’s
research and experimentation generally
were capitalized and held in suspense until
the taxpayer could determine (1) whether
or not the research had failed; and (2) if
the research was successful, whether or
not the research resulted in property that
had a useful life determinable with reasonable accuracy.
Former § 174 allowed taxpayers to
elect to deduct research or experimental
expenditures paid or incurred in connection with a trade or business as currently
deductible expenses, to capitalize and
amortize such expenditures over a period
of not less than 60 months, or to charge
such expenditures to capital account.
(2) Definition of research or experimental expenditures under former § 174.
The provisions of § 1.174-2 address the
scope and definition of research or experimental expenditures under former § 174.
Specifically, § 1.174-2(a)(1) provides

that the term “research or experimental
expenditures” means those expenditures
incurred in connection with a taxpayer’s
trade or business that represent research
and development costs in the experimental or laboratory sense, and generally
includes all such costs incident to the
development or improvement of a product
or a component or subcomponent of the
product, as well as the costs of obtaining
a patent. Expenditures represent research
and development costs in the experimental or laboratory sense if they are for activities intended to discover information that
would eliminate uncertainty concerning
the development or improvement of a
product. Section 1.174-2(a)(3) defines the
term “product” to include any pilot model,
process, formula, invention, technique,
patent, or similar property, and includes
products to be used by the taxpayer in its
trade or business as well as products to be
held for sale, lease, or license.
Section 1.174-2(a)(10) and (b)(3)
generally provide that former § 174 also
applies to expenditures paid or incurred
by a taxpayer for research or experimentation carried on by another person or
organization (such as a research institute,
foundation, engineering company, or similar contractor) on behalf of the taxpayer,
provided that such expenditures are made
at the taxpayer’s order and risk. However,
§ 1.174-2 does not explicitly address
expenditures paid by a contractor for
research or experimentation carried on for
another person or organization.
Section 1.174-2(a) also provides guidance on expenditures that are not subject
to former § 174, including costs paid or
incurred in the production of a product
after the elimination of uncertainty concerning the development or improvement
of the product, and expenditures for: quality control testing, efficiency surveys,
management studies, consumer surveys,
advertising or promotions, the acquisition
of another’s product, and research in connection with literary, historical or similar
projects. In addition, § 1.174-2(b) and
former § 174(c) provide that any expenditure for the acquisition or improvement

Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2023–39

919

September 25, 2023

of land or depreciable property to be
used in connection with the research or
experimentation and of a character which
is subject to the allowance under § 167
or § 611 are not research or experimental
expenditures. However, allowances for
depreciation and depletion with respect
to such property are treated as research
or experimental expenditures. Finally,
§ 1.174-2(c) and former § 174(d) provide that the provisions of former § 174
are not applicable to any expenditures
paid or incurred for the purpose of ascertaining the existence, location, extent, or
quality of any deposit of ore, oil, gas, or
other mineral.
(3) Software development. Prior to the
effective date of the TCJA amendments
to former § 174, section 5 of Rev. Proc.
2000-50, 2000-2 C.B. 601, permitted taxpayers to treat costs to develop computer
software that were not otherwise treated
as research or experimental expenditures
under former § 174 as currently deductible expenses or capital expenditures
that are amortized over 60 months or 36
months. Accordingly, under section 5
of Rev. Proc. 2000-50, costs to develop
computer software that did not otherwise
meet the definition of research or experimental expenditures under former § 174
were afforded generally similar treatment to research or experimental expenditures under former § 174. Rev. Proc.
2000-50 does not define software development or otherwise describe software
development activities. See also Kellett
v. Commissioner, T.C. Memo. 2022-62
(discussing, and questioning the statutory
support for, deduction of software development expenditures under Rev. Proc.
2000-50).
.02 Treatment of research or experimental expenditures under the TCJA.
(1) Requirement to capitalize and
amortize SRE expenditures. Section
13206(a) of the TCJA amended former
§ 174 for amounts paid or incurred in taxable years beginning after December 31,
2021. For such amounts, § 174(a)(1) disallows deductions for SRE expenditures,
except as provided in § 174(a)(2). Section
174(a)(2) requires taxpayers to charge
SRE expenditures to capital account and
allows amortization deductions of such
capitalized expenditures ratably over the
applicable § 174 amortization period,

September 25, 2023

beginning with the midpoint of the taxable
year in which such expenditures are paid
or incurred. As used in this notice, the term
“applicable § 174 amortization period”
refers to a 5-year (60-month) period in
the case of SRE expenditures attributable
to domestic research or a 15-year (180month) period in the case of SRE expenditures attributable to foreign research, as
defined in section 3.03 of this notice.
(2) Definition of SRE expenditures.
Section 174(b), as amended by section
13206(a) of the TCJA, defines “SRE
expenditures” to mean, with respect to any
taxable year beginning after December
31, 2021, research or experimental expenditures that are paid or incurred by the
taxpayer during such taxable year in connection with the taxpayer’s trade or business. See Snow v. Commissioner, 416 U.S.
500 (1974) (“in connection with” a trade
or business is broader than “in carrying
on” a trade or business).
(3) Software development. Section
13206(a) of the TCJA added new § 174(c)
(3) to require that any amount paid or
incurred in connection with the development of any software in taxable years
beginning after December 31, 2021, be
treated as a research or experimental
expenditure (and thus an SRE expenditure
to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).
(4) Amortization deductions for disposed of, retired, or abandoned property.
Section 13206(a) of the TCJA added new
§ 174(d) to provide that deductions of
SRE expenditures may not be taken on
account of the disposition, retirement, or
abandonment of property with respect to
which such SRE expenditures are paid or
incurred. If such property is disposed of,
retired, or abandoned during the applicable § 174 amortization period, § 174(d)
requires that the amortization deductions
for such SRE expenditures continue over
that period.
(5) Other changes to former § 174.
Section 13206(a) of the TCJA redesignated former § 174(c) to § 174(c)(1) and
former § 174(d) to § 174(c)(2), removed
former § 174(e), which provided that only
reasonable expenditures are considered
research or experimental expenditures
under former § 174, and also removed
former § 174(f), which contained

920

cross-references to basis adjustments
under § 1016(a)(14) and to an election for
10-year amortization under § 59(e).
(6) Change in method of accounting.
(a) TCJA requirement. Section 13206(b)
of the TCJA requires taxpayers to apply
the provisions of § 174, as amended by
section 13206(a) of the TCJA, as a change
in method of accounting for purposes of
§ 481, initiated by the taxpayer and made
with the consent of the Secretary of the
Treasury or her delegate, and applied on
a cutoff basis to SRE expenditures paid or
incurred in taxable years beginning after
December 31, 2021. Thus, no adjustments
under § 481(a) are permitted or required
with respect to research or experimental
expenditures paid or incurred in taxable
years beginning before January 1, 2022.
(b) Procedural guidance. On December
12, 2022, the Treasury Department and
the IRS issued Rev. Proc. 2023-8, 2023-3
I.R.B. 407, to provide procedures for
taxpayers to obtain automatic consent to
change methods of accounting to comply with § 174, as amended by the TCJA.
On December 29, 2022, the Treasury
Department and the IRS issued Rev. Proc.
2023-11, 2023-3 I.R.B. 417, to modify
and supersede Rev. Proc. 2023-8. The
change in method of accounting provided
by Rev. Proc. 2023-11 was subsequently
included in section 7.02 of Rev. Proc.
2023-24, 2023-28 I.R.B. 1207. Section
7.02 of Rev. Proc. 2023-24 implements
the requirement imposed by § 13206(b) of
the TCJA that a taxpayer must make this
change in method of accounting on a cutoff basis if the change was made during
the taxpayer’s first taxable year beginning
after December 31, 2021. However, section 7.02 of Rev. Proc 2023-24 provides
that a taxpayer making the change for a
taxable year subsequent to the taxpayer’s first taxable year beginning after
December 31, 2021, is required to make
that change with a modified § 481(a)
adjustment that takes into account only
SRE expenditures paid or incurred in
taxable years beginning after December
31, 2021. Section 7.02(7) of Rev. Proc.
2023-24 also provides that a taxpayer
that changes its method of accounting for
SRE expenditures under the revenue procedure will receive limited audit protection. Specifically, audit protection will not
apply for expenditures paid or incurred in

Bulletin No. 2023–39

taxable years beginning before January 1,
2022. Audit protection also will not apply
for expenditures paid or incurred in taxable years beginning after December 31,
2021, if a change in method of accounting
is made for the taxable year immediately
subsequent to the first taxable year beginning after December 31, 2021. See section
10.02 of this notice for additional procedural guidance the Treasury Department
and IRS intend to issue.
SECTION 3. CAPITALIZATION
AND AMORTIZATION OF SRE
EXPENDITURES
.01 Purpose. The Treasury Department
and the IRS intend to propose rules in
forthcoming proposed regulations consistent with the interim guidance provided in
this section 3, which provides taxpayers
with clarity regarding the requirement in
§ 174(a) to capitalize and amortize SRE
expenditures and the treatment of short
taxable years.
.02 Requirement to capitalize and
amortize SRE expenditures. Taxpayers
are required to capitalize SRE expenditures (as defined in section 4.02(2) of this
notice) and amortize such expenditures
ratably over the applicable § 174 amortization period beginning with the midpoint
of the taxable year in which such expenditures are paid or incurred.
.03 Definition of foreign research. The
term foreign research means any research
conducted outside the United States, the
Commonwealth of Puerto Rico, or any
U.S. territory or other possession of the
United States. See §§ 174(a)(2)(B) and
41(d)(4)(F).
.04 SRE expenditures attributable to
foreign research. Taxpayers must look to
where the SRE activities (as defined in section 4.02(4) of this notice) are performed
to determine whether the corresponding
SRE expenditures are attributable to foreign research for purposes of section 3.02
of this notice.
.05 Definition of midpoint. Except as
provided in section 3.06 of this notice,
for purposes of determining when amortization begins under § 174(a)(2)(B) and
section 3.02 of this notice, the term midpoint means the first day of the seventh
month of the taxable year in which the
SRE expenditures are paid or incurred.

Bulletin No. 2023–39

See section 7.03 of this notice for interim
guidance with respect to SRE expenditures that relate to property disposed of
before the midpoint of the taxable year in
which such SRE expenditures are paid or
incurred.
.06 Short taxable years.
(1) In general. The amortization deduction for a short taxable year is based on
the number of months in the short taxable
year. If a short taxable year includes part
of a month, the entire month is included in
the number of months in the taxable year,
but the same month may not be counted
more than once. If a taxpayer has two successive short taxable years and the first
short taxable year ends in the same month
that the second short taxable year begins,
the taxpayer should include that month in
the first short taxable year and not in the
second short taxable year.
(2) Midpoint for short taxable years.
The midpoint of a short taxable year is
the first day of the midpoint month. In the
case of a short taxable year with an even
number of months (as determined under
section 3.06(1) of this notice), the midpoint month is determined by dividing the
number of months in the short taxable year
by two and then adding one (for example,
for a short taxable year consisting of ten
months, the midpoint month is the sixth
month of the short taxable year ((10 / 2)
+ 1 = 6)). In the case of a short taxable
year with an odd number of months (as
determined under section 3.06(1) of this
notice), the midpoint month is the month
for which there are an equal number of
months before and after such month (for
example, for a short taxable year consisting of seven months, the mid-point month
is the fourth month of the short taxable
year).
.07 Example.
(1) Facts. Taxpayer is a calendar-year taxpayer
that incorporated and began operations on October
17, 2022. In 2022, Taxpayer paid or incurred $60,000
in SRE expenditures that were not attributable to foreign research. Taxpayer has no short taxable years
after its initial taxable year.
(2) Analysis. Taxpayer has a short taxable
year that begins on October 17, 2022, and ends on
December 31, 2022, and thus is treated as having a
three-month taxable year under section 3.06(1) of
this notice. The midpoint month is November, and
thus November 1, 2022, will be treated as the midpoint under section 3.06(2) of this notice. In 2022,
Taxpayer amortizes $2,000 of SRE expenditures
($60,000 / 60 months × 2 months). In taxable years
2023 through 2026, each a full 12-month taxable

921

year, Taxpayer amortizes $12,000 ($60,000 / 60
months × 12 months) each year, or $48,000 total.
In 2027, Taxpayer amortizes the remaining $10,000
($60,000 / 60 months × 10 months).

SECTION 4. SCOPE OF
SECTION 174
.01 Purpose. The Treasury Department
and the IRS intend to propose rules in forthcoming proposed regulations consistent
with the interim guidance provided in this
section 4, which provides taxpayers with
clarity in determining whether expenditures are SRE expenditures subject to capitalization and amortization under § 174.
.02 Definition of SRE expenditures and
other relevant terms. For purposes of this
notice:
(1) Terms used in § 1.174-2. Unless
otherwise provided, all terms used in this
notice have the same meaning as those in
§ 1.174-2. For example, the term product
has the meaning set forth in § 1.174-2(a)
(3).
(2) SRE expenditures defined. The term
SRE expenditures means, with respect to
any taxable year beginning after December
31, 2021, research or experimental expenditures (as defined in section 4.02(3) of
this notice), which are paid or incurred
by the taxpayer during such taxable year
in connection with the taxpayer’s trade or
business.
(3) Research or experimental expenditures defined. The term research or experimental expenditures means expenditures
that—
(a) satisfy the requirements under
§ 1.174-2 to be research or experimental
expenditures, or
(b) are paid or incurred in connection
with the development of any computer
software (as provided in section 5 of
this notice), regardless of whether such
expenditures are research or experimental
expenditures under § 1.174-2.
See section 6 of this notice for rules to
determine whether expenditures paid or
incurred pursuant to a contract meet the
definition of research or experimental
expenditures under this section 4.02(3).
(4) SRE activities defined. The term
SRE activities means—
(a) software development activities
described in section 5.03 of this notice, or
(b) research or experimental activities
described in § 1.174-2 (that is, activities

September 25, 2023

in the experimental or laboratory sense
intended to discover information that
would eliminate uncertainty concerning the development or improvement or
appropriate design of a product or a component or subcomponent of a product).
.03 Identification and allocation of
SRE expenditures. As provided in section 4.02(2) and (3) of this notice, SRE
expenditures include expenditures that
satisfy the requirements under § 1.174-2
or are paid or incurred in connection with
the development of any computer software, regardless of whether such software
expenditures satisfy the requirements
under § 1.174-2. Section 1.174-2(a)(1) and
(5) provide that research or experimental expenditures under § 1.174-2 include
all costs incident to the development or
improvement of a product, a component of
a product, or subcomponent of a product,
as applicable (that is, research or experimental expenditures under § 1.174-2
include all costs incident to SRE activities described in section 4.02(4)(b) of this
notice). Section 4.03(1) of this notice provides a non-exhaustive list of examples of
the types of costs that are incident to SRE
activities described in section 4.02(4)(b)
of this notice or paid or incurred in connection with software development activities described in sections 4.02(4)(a) and
5.03 of this notice. In other words, section
4.03(1) of this notice provides a non-exhaustive list of examples of the types of
costs that are SRE expenditures. Section
4.03(2) of this notice provides a list of
costs that are not permitted or required to
be treated as SRE expenditures, regardless
of whether they may be incident to SRE
activities described in section 4.02(4) of
this notice. Section 4.03(3) of this notice
provides interim guidance addressing
the allocation of costs, including those
described in section 4.03(1) of this notice,
to SRE activities.
(1) Examples of costs that are SRE
expenditures. The types of costs that are
considered incident to SRE activities
described in section 4.02(4)(b) of this
notice or paid or incurred in connection
with software development activities
described in sections 4.02(4)(a) and 5.03
of this notice include but are not limited
to:
(a) Labor costs. Labor costs of full-time, parttime, and contract employees and independent

September 25, 2023

contractors who perform, supervise, or directly support SRE activities. Labor costs include all elements
of compensation other than severance compensation,
such as basic compensation, stock-based compensation, overtime pay, vacation pay, holiday pay, sick
leave pay, payroll taxes, pension costs, employee
benefits, and payments to a supplemental unemployment benefit plan.
(b) Materials and supplies costs. Costs of
materials and supplies, including tools and equipment that are not depreciable under § 168, which
are used or consumed in the performance of SRE
activities or in the direct support of SRE activities.
For example, a cost described in § 1.162-3, relating
to the cost of a material or supply, may be an SRE
expenditure.
(c) Cost recovery allowances. Depreciation,
amortization, or depletion allowances with respect to
property used in the performance of SRE activities
or in the direct support of SRE activities, including property placed in service in a taxable year that
begins on or before December 31, 2021. For example, depreciation with respect to a test bed used in the
performance of SRE activities, or allocable depreciation with respect to a facility in which SRE activities,
or services that directly support SRE activities, are
performed.
(d) Patent costs. Costs of obtaining a patent, such
as attorneys’ fees expended in making and perfecting
a patent application.
(e) Certain operation and management costs.
Rent, utilities, insurance, taxes, repairs and maintenance costs, security costs, and similar overhead
costs with respect to facilities, equipment and other
assets used in the performance of SRE activities or in
the direct support of SRE activities.
(f) Travel costs. Travel costs for the performance of SRE activities or the direct support of SRE
activities.

(2) Costs that are not treated as SRE
expenditures. The following costs are
not permitted or required to be treated as
SRE expenditures, regardless of whether
they may be incident to SRE activities
described in section 4.02(4)(b) of this
notice or paid or incurred in connection
with software development activities
described in sections 4.02(4)(a) and 5.03
of this notice:
(a) Costs paid or incurred by general
and administrative service departments
(or functions) that only indirectly support
or benefit SRE activities (for example,
services of payroll personnel in preparing salary checks of research personnel,
services of human resources personnel
who hire research personnel, or services
of accounting personnel who account for
research expenses);
(b) Interest on debt to finance SRE
activities;
(c) Costs paid or incurred for activities
described in section 5.05 of this notice;

922

(d) Costs to input content into a
website;
(e) Costs for website hosting that
involve the payment of a specified, periodic fee to an Internet service provider in
return for hosting a website on its server(s)
connected to the Internet;
(f) Costs to register an Internet domain
name or trademark;
(g) Costs listed in § 1.174-2(a)(6)
(i)-(vii);
(h) Amounts representing amortization
of SRE expenditures; and
(i) Amounts representing amortization
of research or experimental expenditures
paid or incurred in taxable years beginning before January 1, 2022.
(3) Allocation method. To determine
total SRE expenditures for a taxable year,
taxpayers must allocate costs, including
the types of costs described in section
4.03(1) of this notice, to SRE activities
on the basis of a cause-and-effect relationship between the costs and the SRE
activities or another relationship that
reasonably relates the costs to the benefits provided to the SRE activities. The
allocation method used for one type of
cost may be different than the allocation
method used for another type of cost.
However, the allocation method used for
each type of cost must be applied on a
consistent basis. For example, a taxpayer
that consistently allocates labor costs
described in section 4.03(1)(a) of this
notice to SRE activities by multiplying
such labor costs by the ratio of the total
time the person or people actually spent
performing, supervising, or directly supporting SRE activities during the taxable
year to the total time the person or people spent performing all services for the
taxpayer during the taxable year, meets
the requirements in this section 4.03(3).
Similarly, a taxpayer that consistently
allocates facility cost recovery allowances described in section 4.03(1)(c) of
this notice to SRE activities by multiplying such cost recovery allowances by
the ratio of the square footage of the area
used to conduct or directly support SRE
activities to the total square footage of
the facility, meets the requirement of this
section 4.03(3). An allocation method
for a particular type of cost that meets
the requirements of this section 4.03(3)
may not be appropriate for purposes of

Bulletin No. 2023–39

allocating that same type of cost under
other sections of the Code.
(4) Example. The following example
illustrates the rules set forth in section
4.03 of this notice.

(a) Facts. Company A, a calendar year taxpayer, is engaged in the business of manufacturing
chemical products. On January 1, 2023, Company
A begins a research project to develop a new product. This research project constitutes an SRE activity. Company A does not undertake any other SRE
activities during its 2023 taxable year. Company A is

comprised of six departments: (1) the Manufacturing
Department, (2) the Research Department, (3) the
Engineering Department, (4) the Legal Department,
(5) the Personnel Department, and (6) the Accounting
Department. The Manufacturing Department does
not provide any support services to the Research
Department. The Personnel Department provides
indirect support services to the Research Department
by hiring research personnel and preparing their paychecks but does not directly support any aspect of
the research project. The Accounting Department
provides indirect support services to the Research
Department by paying Research Department

invoices and accounting for research costs but does
not directly support any aspect of the research project. The Engineering Department provides direct
support services to the Research Department with
respect to the research project by collaborating with
the Research Department to develop the new product. The Legal Department provides direct support
services to the Research Department with respect to
the research project by preparing patent applications
for the new product. Company A owns the following
assets, each of which is used, in whole or in part,
to perform research or directly support the research
project:

Description

Department(s)

Depreciation for 2023

10,000 square foot facility

The Manufacturing Department occupies 5,000 square feet of the
facility. The other departments each occupy 1,000 square feet.

$200,000

Computers, furniture, and equipment used exclusively for the
research project

Research Department

$150,000

Computers, furniture, and equipment used by the Engineering
Department

Engineering Department

$100,000

Computers and furniture used by the Legal Department

Legal Department

$20,000

In addition to interest on debt used to finance operations and research and costs specific to the Manufacturing,

Personnel, and Accounting Departments, Company A
incurs the following costs during its 2023 taxable year:

Description

Department(s)

Total Cost

Materials and supplies used exclusively for the research project

Research Department

$50,000

Materials and supplies used by the Engineering Department

Engineering Department

$40,000

Materials and supplies used by the Legal Department

Legal Department

$10,000

Labor costs of Research Department employees and their direct
supervisor, each of which spends 100% of their time on the
research project

Research Department

$600,000

Labor costs of all Engineering Department employees, each of
which spends 20% of their time on the research project

Engineering Department

$200,000

Labor costs of all Legal Department employees, each of which
spends 10% of their time on the research project

Legal Department

$100,000

Electricity for the facility

The Research Department and the Manufacturing Department
consume large amounts of electricity relative to the other
departments. The Research Department uses 100,000 kilowatthours of electricity. The Manufacturing Department uses 220,000
kilowatt-hours of electricity. The other departments each use
20,000 kilowatt-hours of electricity.

$200,000

Other utilities and overhead costs for the facility

All departments benefit from such costs in proportion to square
footage occupied

$100,000

Other miscellaneous overhead costs incurred by the Research
Department

Research Department

$50,000

Other miscellaneous overhead costs incurred by the Engineering
Department

Engineering Department

$50,000

Other miscellaneous overhead costs incurred by the Legal
Department

Legal Department

$50,000

(b) Analysis. Pursuant to section 4.03(1) of
this notice, Company A determines that the costs
described in the tables in section 4.03(4)(a) are the
types of costs that are incident to SRE activities
described in section 4.02(4) of this notice. Pursuant
to section 4.03(2)(a) of this notice, Company A determines that the costs incurred by the Manufacturing,

Bulletin No. 2023–39

Personnel, and Accounting Departments are not
treated as SRE expenditures because the activities
of those departments are not SRE activities and
such costs either do not, or only indirectly, support
or benefit SRE activities. Similarly, pursuant to
section 4.03(2)(b) of this notice, Company A determines that interest on debt used to finance operations

923

and research is not treated as an SRE expenditure.
Pursuant to section 4.03(3) of this notice, Company
A determines its total SRE expenditures for 2023 by
allocating the costs described in the tables in section
4.03(4)(a) of this notice to its SRE activities on the
basis of a cause-and-effect relationship between the
costs and the SRE activities or another relationship

September 25, 2023

that reasonably relates the costs to the benefits provided to the SRE activities as provided in the following table. This allocation method generally relates
the costs described in the tables in section 4.03(4)
(a) of this notice to SRE activities on the basis of
total labor hours spent on such activities; however,

for certain costs, Company A determines that a different allocation method more appropriately relates
the costs to the benefits that they provide to the SRE
activities, such as an allocation method based on the
relative square footage of each department. As noted
in section 4.03(4)(a), employees in the Research

Department spent 100% of their time on SRE activities, employees in the Engineering Department spent
20% of their time on SRE activities, and employees
in the Legal Department spent 10% of their time on
SRE activities.

Description

Allocation Method

Amount of SRE
Expenditure

Depreciation on facility - $200,000

Research Department: $20,000 ($200,000 × 1,000/10,000 square feet ×
100% of time spent by Research Department on research project)
+
Engineering Department: $4,000 ($200,000 × 1,000/10,000 square feet ×
20% of time spent by Engineering Department on research project)
+
Legal Department: $2,000 ($200,000 × 1,000/10,000 square feet × 10%
of time spent by Legal Department on research project)

$26,000

Depreciation on computers, furniture, and equipment used by
the Research Department exclusively for the research project
- $150,000

$150,000 × 100% use for research project

$150,000

Depreciation on computers, furniture and equipment used by
the Engineering Department - $100,000

$100,000 × 20% of time spent by Engineering Department employees on
the research project

$20,000

Depreciation on computers and furniture used by the Legal
Department - $20,000

$20,000 × 10% of time spent by Legal Department employees on the
research project

$2,000

Materials and supplies used exclusively by the Research
Department for the research project - $50,000

$50,000 × 100% use for research project

$50,000

Materials and supplies used by the Engineering Department
- $40,000

$40,000 × 20% of time spent by Engineering Department employees on
the research project

$8,000

Materials and supplies used by the Legal Department - $10,000

$10,000 × 10% of time spent by Legal Department employees on the
research project

$1,000

Labor costs of Research Department employees and their direct
supervisor - $600,000

$600,000 × 100% of time spent by Research Department employees on
the research project

$600,000

Labor costs of Engineering Department employees - $200,000

$200,000 × 20% of time spent by Engineering Department employees on
the research project

$40,000

Labor costs of Legal Department employees - $100,000

$100,000 × 10% of time spent by Legal Department employees on the
research project

$10,000

Electricity for the facility - $200,000

Research Department $50,000 ($200,000 × 100,000/400,000 kilowatthours used for research project)
+
Engineering Department $2,000 ($200,000 × 20,000/400,000 kilowatthours used by Engineering Department × 20% of time spent by
Engineering Department employees on the research project)
+
Legal Department $1,000 ($200,000 × 20,000/400,000 kilowatt-hours
used by Legal Department × 10% of time spent by Legal Department
employees on research project)

$53,000

Other utilities and overhead costs for the facility - $100,000

Research Department $10,000 ($100,000 × 1,000/10,000 square feet ×
$13,000
100% of time spent by Research Department on research project)
+
Engineering Department $2,000 ($100,000 × 1,000/10,000 square feet ×
20% of time spent by Engineering Department on research project)
+
Legal Department $1,000 ($100,000 × 1,000/10,000 square feet × 10% of
time spent by Legal Department on research project)

Other miscellaneous overhead costs incurred by the Research
Department - $50,000

$50,000 × 100% of time spent by Research Department employees on the $50,000
research project

Other miscellaneous overhead costs incurred by the
Engineering Department - $50,000

$50,000 × 20% of time spent by Engineering Department employees on
the research project

$10,000

Other miscellaneous overhead costs incurred by the Legal
Department - $50,000

$50,000 × 10% of time spent by Legal Department employees on the
research project

$5,000

Total SRE Expenditures

September 25, 2023

$1,038,000

924

Bulletin No. 2023–39

.04 Consistency requirement. SRE
expenditures must be treated consistently
for purposes of all provisions under subtitle
A of the Code (subtitle A). Thus, expenditures that are defined as SRE expenditures
under section 4.02(2) of this notice must
be treated as SRE expenditures for all purposes under subtitle A. Such expenditures
may not be treated as ordinary and necessary expenses under § 162 or capitalized
under § 195, § 263(a), § 263A, or § 471.
The amortization deductions arising from
such SRE expenditures must also be allocated and apportioned consistent with the
rules under §§ 1.861-8 and 1.861-17.
SECTION 5. SOFTWARE
DEVELOPMENT
.01 Purpose. The Treasury Department
and the IRS intend to propose rules in
forthcoming proposed regulations consistent with the interim guidance provided in
this section 5, which provides taxpayers
with clarity in determining whether certain activities constitute software development for purposes of § 174(c)(3).
.02 Defined terms. For purposes of this
notice:
(1) Computer software. The term
computer software generally means any
computer program or routine (that is, any
sequence of code) that is designed to cause
a computer to perform a desired function
or set of functions, and the documentation required to describe and maintain
that program or routine. The code may be
stored on a computing device, affixed to
a tangible medium (for example, a disk
or DVD), or accessed remotely via a private computer network or the Internet, for
example, via cloud computing. Computer
software generally includes system software, programming software, application
software, embedded software, and all
forms and media in which the software
is contained, whether written, magnetic,
or otherwise. Computer software also
generally includes computer programs of
all classes, for example, operating systems, executive systems, software monitors, compilers and translators, assembly
routines, and utility programs as well as
application programs.
Computer software includes a computer program, a group of programs,
and upgrades and enhancements (as

Bulletin No. 2023–39

defined in section 5.02(2) of this notice).
Computer software also includes any
incidental and ancillary rights that are
necessary to effect the acquisition of the
title to, the ownership of, or the right to
use the computer software, and that are
used only in connection with that specific
computer software. Computer software
includes software developed for use by
the taxpayer in its trade or business or
for sale or licensing to others. Computer
software does not include any data or
information base described in § 1.1972(b)(4) unless the database or item is in
the public domain and is incidental to a
computer program. For example, customer lists or client files are not included
in computer software unless such items
are in the public domain and incidental
to a computer program. Additionally,
computer software does not include any
procedures that are external to the computer’s operation.
(2) Upgrades and enhancements. The
term upgrades and enhancements generally means modifications to existing
computer software that result in additional
functionality (enabling the software to perform tasks that it was previously incapable of performing), or materially increase
speed or efficiency of the software.
.03 Activities that are treated as software development. Activities that are
treated as software development for purposes of § 174 generally include but are
not limited to:
(1) Planning the development of the
computer software (or the upgrades and
enhancements to such software), including identification and documentation of
the software requirements;
(2) Designing the computer software
(or the upgrades and enhancements to
such software);
(3) Building a model of the computer
software (or the upgrades and enhancements to such software);
(4) Writing source code and converting
it to machine-readable code;
(5) Testing the computer software (or
the upgrades and enhancements to such
software) and making necessary modifications to address defects identified during
testing, but only up until the point in time
that:
(a) In the case of computer software
developed for use by the taxpayer in its

925

trade or business, the computer software
is placed in service; and
(b) In the case of computer software
developed for sale or licensing to others,
technological feasibility has been established, product masters(s) have been produced, and the computer software is ready
for sale or licensing to others; and
(6) In the case of computer software
developed for sale or licensing to others
(or the upgrades and enhancements to
such software), production of the product
master(s).
.04 Software development activities
related to purchased computer software.
In the case of upgrades and enhancements
to purchased computer software, the principles set forth in section 5.03 of this
notice apply. However, the purchase and
installation of purchased computer software, including the configuration of precoded parameters to make such software
compatible with the business and reengineering the business to make it compatible with the purchased software, and any
planning, designing, modeling, testing, or
deployment activities with respect to the
purchase and installation of such software, are not activities that constitute software development for purposes of § 174.
.05 Activities that are not treated as
software development. The following
activities associated with software development projects are not treated as software development for purposes of § 174:
(1) Computer software developed by
a taxpayer for use in its trade or business. In the case of computer software
that is developed for use by the taxpayer
in its trade or business (or upgrades and
enhancements to such software):
(a) Training employees and other
stakeholders that will use the computer
software;
(b) Maintenance activities after the
computer software is placed in service
that do not give rise to upgrades and
enhancements (for example, corrective
maintenance to debug, diagnose, and fix
programming errors);
(c) Data conversion activities, except
for activities to develop computer software that facilitate access to existing data
or data conversion; and
(d) Installing the computer software
and other activities relating to placing the
computer software in service.

September 25, 2023

(2) Computer software developed for
sale or licensing to others. In the case of
computer software that is developed for
sale or licensing to others (or upgrades
and enhancements to such software),
activities that occur after such software
(or upgrades and enhancements to such
software) is ready for sale or licensing
to others, such as marketing and promotional activities, maintenance activities
that do not give rise to upgrades and
enhancements, distribution activities (for
example, making the software available
via remote access), and customer support
activities.
SECTION 6. RESEARCH
PERFORMED UNDER CONTRACT
.01 Purpose. The Treasury Department
and the IRS intend to propose rules in
forthcoming proposed regulations consistent with the interim guidance provided in
this section 6, which provides taxpayers
with clarity in determining whether costs
paid or incurred for research performed
under contract are SRE expenditures
under § 174.
.02 Defined terms. For purposes of this
section 6:
(1) Research provider. The term
research provider means the party that
contracts with a research recipient (as
defined in section 6.02(2) of this notice)
to:
(a) perform research services for the
research recipient with respect to an SRE
product, or
(b) develop an SRE product (as defined
in section 6.02(4) of this notice) that
the research recipient acquires from the
research provider.
(2) Research recipient. The term
research recipient means the party that
contracts with the research provider to:
(a) perform research services for the
research recipient with respect to an SRE
product, or
(b) develop an SRE product that the
research recipient acquires from the
research provider.
(3) Financial risk. The term financial
risk means the risk that the research provider may suffer a financial loss related to
the failure of the research to produce the
desired SRE product.

September 25, 2023

(4) SRE product. The term SRE product means any pilot model, process,
formula, invention, technique, patent,
computer software, or similar property
(or a component thereof) that is subject
to protection under applicable domestic or foreign law. For example, mere
know-how gained by a research provider
through the performance of research services for a research recipient that is not
subject to protection under applicable
domestic or foreign law does not give
rise to an SRE product in the hands of the
research provider.
.03 Treatment of costs paid or incurred
by research recipient. The treatment of
costs paid or incurred by the research
recipient is governed by the principles set
forth in § 1.174-2(a)(10) and (b)(3).
.04 Treatment of costs paid or
incurred by research provider. If the
research provider bears financial risk
under the terms of the contract with the
research recipient, then costs paid or
incurred by the research provider that
are incident to the SRE activities (see
section 4.03 of this notice) performed
by the research provider under the contract are SRE expenditures. However,
even if the research provider does not
bear financial risk under the terms of the
contract with the research recipient, if
the research provider has a right to use
any resulting SRE product in the trade or
business of the research provider or otherwise exploit any resulting SRE product
through sale, lease, or license, then costs
paid or incurred by the research provider
that are incident to the SRE activities
performed by the research provider under
the contract are SRE expenditures of the
research provider for which no deduction
is allowed except as provided in § 174(a)
(2), regardless of whether the research
recipient is required to treat its costs as
SRE expenditures under section 6.03 of
this notice. For purposes of the preceding
sentence, a research provider will not be
treated as having a right to use the SRE
product in the trade or business of the
research provider or otherwise exploit
the SRE product through sale, lease, or
license if such right is available to the
research provider only upon obtaining approval from another party to the
research arrangement that is not related

926

to the research provider within the meaning of § 267 or § 707.
.05 Example. The following example
illustrates the rules set forth in section 6
of this notice.

(1) Facts. Company C engages Company D, a
contractor located in the United States, to develop an
SRE product for use in Company C’s trade or business. The activities undertaken by Company D are
undertaken upon Company C’s order, and Company
D makes no performance guarantees with respect to
the SRE product. Company C will pay Company D
a fixed sum of $25,000 plus an amount equivalent to
Company D’s actual expenditures. Company D does
not have any right to use or otherwise exploit any
resulting SRE product. In 2023, Company D incurs
$125,000 of expenditures to successfully develop the
product in the United States, and Company C pays to
Company D $150,000 pursuant to the terms of the
contract.
(2) Analysis. Under section 6.04 of this notice,
Company D may not treat the $125,000 of expenditures it incurs to develop the SRE product on
behalf of Company C as SRE expenditures under
§ 174 because (i) Company D does not bear financial risk, and (ii) Company D does not have any
right to use or otherwise exploit any resulting SRE
product. Under section 6.03 of this notice, the
$150,000 paid by Company C is an amount paid
to another party for research or experimentation
undertaken on Company C’s behalf under § 1.1742(a)(10) and (b)(3) and is thus an SRE expenditure
under section 4.02(2) of this notice. The applicable
§ 174 amortization period is 5 years (60 months)
because the research is performed by Company D
in the United States. Company C’s location is not
relevant for determination of the applicable § 174
amortization period.

SECTION 7. DISPOSITION,
RETIREMENT, OR
ABANDONMENT OF PROPERTY
.01 Purpose. The Treasury Department
and the IRS intend to propose rules in
forthcoming proposed regulations consistent with the interim guidance provided in
this section 7, which provides taxpayers
with clarity in determining the treatment
of unamortized SRE expenditures if property with respect to which such expenditures are paid or incurred is disposed of,
retired, or abandoned in certain transactions during the applicable § 174 amortization period.
.02 In general. Except as provided in
section 7.04 of this notice, if any property
with respect to which SRE expenditures
are paid or incurred is disposed of, retired,
or abandoned during the applicable
§ 174 amortization period, no recovery is

Bulletin No. 2023–39

allowed with respect to the unamortized
SRE expenditures on account of such
disposition, retirement, or abandonment,
and the taxpayer that disposed of, retired,
or abandoned such property continues to
amortize such expenditures under § 174
over the remainder of the applicable § 174
amortization period. For purposes of this
section 7, the term unamortized SRE
expenditures means the amount of any
SRE expenditures paid or incurred by the
corporation (or its predecessor), less the
amount of any amortization deductions
previously allowed to the corporation (or
its predecessor) under § 174.
.03 Transactions occurring before the
midpoint of the taxable year. An amortization deduction is allowed under § 174
for SRE expenditures even if such expenditures relate to property that is disposed
of, retired, or abandoned prior to the
midpoint of the taxable year in which
such expenditures are paid or incurred.
Accordingly, such expenditures are subject to the rules in sections 7.02 and 7.04
of this notice.

.04 Transaction in which corporation
ceases to exist.
(1) Transaction described in § 381(a).
If a corporation ceases to exist for Federal
income tax purposes in a transaction or
series of transactions described in § 381(a),
the acquiring corporation will continue to
amortize the distributor or transferor corporation’s unamortized SRE expenditures
over the remainder of the distributor or
transferor corporation’s applicable § 174
amortization period beginning with the
month of transfer.
(2) Transaction not described in
§ 381(a).
(a) In general. Except as provided in
section 7.04(2)(b), if a corporation ceases
to exist for Federal income tax purposes
in a transaction or series of transactions to
which § 381(a) does not apply, the corporation is allowed a deduction equal to the
unamortized SRE expenditures in its final
taxable year.
(b) Anti-abuse exception. Section
7.04(2)(a) of this notice does not apply if
a principal purpose of the transaction(s)

described in section 7.04(2)(a) of this
notice is to claim a deduction for the
unamortized SRE expenditures.
.05 Examples. The following examples
illustrate the rules set forth in section 7 of
this notice.

(1) Sale of property with respect to which SRE
expenditures were incurred.
(a) Facts. Company X, an accrual method, calendar-year taxpayer, incurs $100,000 in SRE expenditures in 2023 for research performed in the United
States. On September 30, 2025, Company X sells
the property with respect to which such expenditures
were incurred to Company Y and recognizes gain
under § 1001.
(b) Analysis. In 2023, Company X amortizes
$10,000 (10% × $100,000). See section 3.05 of this
notice. In 2024, Company X amortizes $20,000
(20% × $100,000). In 2025 through 2028, Company
X ratably amortizes the remaining $70,000
($100,000 – $10,000 – $20,000) notwithstanding
Company X’s disposition of the assets with respect
to which Company X’s SRE expenditures were
incurred. Company Y does not amortize any portion
of the SRE expenditures originally paid or incurred
by Company X. Company X does not factor its
unamortized SRE expenditures into the computation of gain or loss under § 1001. See section 7.02
of this notice.

2023

2024

2025

2026

2027

2028

Company X amortization %

10%

20%

20%

20%

20%

10%

Company X Dollar amount

$10,000

$20,000

$20,000

$20,000

$20,000

$10,000

(c) Applicable asset acquisition. The results would
be the same as in section 7.05(1)(b) of this notice if the
sale of property with respect to which the SRE expenditures were incurred were part of an applicable asset
acquisition within the meaning of § 1060(c).
(d) Section 351 exchange. The results would
be the same as in section 7.05(1)(b) of this notice
if X transferred the property with respect to which
the SRE expenditures were incurred in an exchange
described in § 351.

(2) Section 381(a) transaction.
(a) Facts. The facts are the same as in section
7.05(1)(a) of this notice, except that, on October 16,
2025, Company X is acquired by Company Z, an
accrual method, calendar-year taxpayer, in a transaction described in § 381(a).
(b) Analysis. In 2023, Company X amortizes
$10,000 (10% × $100,000). See section 3.05 of this
notice. In 2024, Company X amortizes $20,000
(20% × $100,000). In 2025, Company X amortizes

$15,000 ((9 months/12 months) × 20% × $100,000),
and Company Z amortizes $5,000 ((3 months/12
months) × 20% × $100,000). See sections 3.06(1),
7.02, and 7.04(1) of this notice. In 2026 through
2028, Company Z ratably amortizes the remaining
$50,000 ($100,000 – $10,000 – $20,000 – $15,000
– $5,000).

2023

2024

2025

2026

2027

2028

Company X amortization %

10%

20%

15%

0%

0%

0%

Company Z amortization %

0%

0%

5%

20%

20%

10%

Company X Dollar amount

$10,000

$20,000

$15,000
$20,000

$20,000

$10,000

Company Z Dollar amount

SECTION 8. LONG-TERM
CONTRACTS UNDER § 460
.01 Purpose. The Treasury Department
and the IRS are providing this interim

Bulletin No. 2023–39

$5,000

guidance to provide taxpayers with information about a proposed revision to the
regulations under § 460 in forthcoming proposed regulations regarding how
to apply the percentage-of-completion

927

method (PCM) to account for income
from long-term contracts when allocable
contract costs include SRE expenditures.
.02 Background. Section 460(a) generally requires use of the PCM to account for

September 25, 2023

taxable income from a long-term contract.
Section 1.460-4(b)(2)(i) provides that
under the PCM, the portion of the contract
price a taxpayer must report in a tax year
corresponds to the ratio of incurred allocable contract costs to total estimated allocable contract costs. This ratio represents the
portion of a contract considered completed
for purposes of the PCM. Under the PCM,
a taxpayer generally deducts allocable
contract costs as they are incurred. As provided by § 1.460-4(b)(2)(iv), an increase
in the percentage of the contract price to
be reported is matched by deduction of
the incurred costs that cause the increase.
Under the current § 460 regulations in
§ 1.460-5(b)(2)(vi), allocable contract
costs include research or experimental
expenses, other than independent research
and development expenses. Thus, when
these expenses are incurred, they increase
the portion of a contract considered completed and the percentage of the contract
price required to be reported. The current
§ 460 regulations were drafted when a
taxpayer could deduct currently research
or experimental expenses under former
§ 174. Section 174(a), as amended by the
TCJA, requires that SRE expenditures be
charged to capital account and deducted
over the applicable § 174 amortization
period. As a result, the current § 460 regulations provide that incurred research or
experimental expenses increase the percentage of the contract price required to
be reported, although § 174(a) prevents
a corresponding current deduction of
incurred SRE expenditures. The resulting
mismatch of contract price and contract
costs is inconsistent with the contemplated operation of the PCM.
.03 Treatment of SRE expenditures
under § 460. The Treasury Department
and the IRS anticipate issuing proposed
regulations that would amend the existing
§ 460 regulations, including § 1.460-5(b)
(2)(vi), to provide that the costs allocable to a long-term contract accounted
for using the PCM include amortization
of SRE expenditures under § 174(a)(2)
(B), rather than the capitalized amount of
such expenditures, and that such amortization is treated as incurred for purposes
of determining the percentage of contract
completion as deducted. The amendments
would not apply to expenditures previously capitalized under § 59(e)(2)(B) or

September 25, 2023

under former § 174(b), or to independent
research and development expenditures,
as defined in § 460(c)(5), which are not
allocable contract costs. Research or
experimental expenditures that are not
independent research and development
expenditures, however, would remain
subject to allocation under § 460(c)
(1) regardless of whether they are SRE
expenditures.
SECTION 9. COST SHARING
REGULATIONS AT § 1.482‑7
.01 Purpose. The Treasury Department
and the IRS are providing this interim
guidance to provide taxpayers with
information about a proposed revision
to § 1.482‑7(j)(3)(i) in forthcoming proposed regulations.
.02 Background. Section 1.482-7(j)(3)
(i) addresses cost sharing transaction payments (CST Payments) between controlled
participants in a cost sharing arrangement
(CSA) that are made to ensure that each
controlled participant’s share of intangible
development costs (IDCs) is in proportion
to its share of reasonably anticipated benefits from exploitation of the developed
intangibles (RAB share). Section 1.4827(j)(3)(i) generally provides that CST
Payments reduce deductible IDCs borne
by the controlled participant to which the
CST Payments are owed. Any amount of
CST Payment in excess of such deductible IDCs is treated as in consideration
for the use of land and tangible property
furnished for purposes of the CSA by the
controlled participant to which the CST
Payment is owed. CST Payments generally are considered the payor’s costs
of developing intangibles at the location
where such development is conducted.
See also § 1.482-7(j)(3)(iii), Example 1.
.03 Anticipated revisions to § 1.482‑7(j)
(3)(i).
(1) The Treasury Department and the
IRS anticipate issuing proposed regulations that would replace the second
through fourth sentences of § 1.482‑7(j)
(3)(i) with rules providing that CST
Payments owed to a controlled participant
reduce:
(a) The amount of the category of IDCs
borne directly by that participant that are
required to be charged to capital account,
and

928

(b) The amount of the category of IDCs
borne directly by that participant that are
not described in section 9.03(1)(a) of this
notice and that are deductible.
(2) CST Payments not in excess of the
payor’s RAB share of the total amount of
the IDCs in both categories described in
section 9.03(1)(a) and (b) of this notice
reduce the amount of each such category
of IDCs in the same proportion that the
total amount of the IDCs in each category
bears to the total amount of IDCs in both
categories. CST Payments in excess of the
payor’s RAB share of the total amount of
IDCs in both categories described in section 9.03(1)(a) and (b) of this notice will
be treated as income.
.04 Examples. The examples provided
below illustrate the anticipated revisions
to § 1.482-7(j)(3)(i).

(1) Example 1.
(a) Facts. U.S. Parent (USP) and its wholly
owned Foreign Subsidiary (FS) form a CSA to
develop a miniature widget, the Small R. Based on
RAB shares, USP agrees to bear 40% and FS agrees
to bear 60% of the IDCs incurred during the term
of the agreement. USP incurs $100,000 of IDCs to
perform research in the United States annually and
FS incurs $100,000 of IDCs to perform research in
country X annually. USP’s IDCs are required under
U.S. Federal income tax rules to be charged to capital
account and amortized ratably over the 5-year applicable § 174 amortization period beginning with the
midpoint of the taxable year in which such expenditures are paid or incurred, and FS’s IDCs incurred
in country X are required under U.S. Federal income
tax rules to be charged to capital account and amortized ratably over the 15-year applicable § 174 amortization period beginning with the midpoint of the
taxable year in which such expenditures are paid or
incurred.
(b) Analysis. Of the total IDCs of $200,000,
USP’s share is $80,000 ($200,000 × 40%) and FS’s
share is $120,000 ($200,000 × 60%) so that FS must
make a payment to USP of $20,000 ($120,000 –
$100,000). The CST Payment reduces USP’s IDCs
in the United States that are required to be charged
to capital account by $20,000. Accordingly, USP is
required to charge $80,000 to capital account, all of
which is required to be amortized over 5 years, while
FS is required to charge $120,000 to capital account,
$100,000 of which is required to be amortized over
15 years, and $20,000 of which is required to be
amortized over 5 years.
(2) Example 2.
(a) Facts. The facts are the same as in Example
1, except that the $100,000 of IDCs borne by USP
consist of (1) $5,000 of IDCs incurred by USP in
the United States that are required to be charged
to capital account and amortized ratably over the
5-year applicable § 174 amortization period beginning with the midpoint of the taxable year in which
such expenditures are paid or incurred, (2) $5,000
of deductible IDCs, and (3) $90,000 of arm’s length

Bulletin No. 2023–39

rental charge, as described in § 1.482-7(d)(1)(iii), for
the use of USP’s facility in the United States.
(b) Analysis. As in Example 1, of the total IDCs
of $200,000, USP’s share is $80,000 and FS’s share
is $120,000, so that FS must make a payment to
USP of $20,000. The $20,000 CST Payment from
FS to USP will first be treated as reducing the
$5,000 of IDCs that are required to be charged to
capital account and the $5,000 of deductible IDCs
pro rata to the extent of FS’s RAB share of such
IDCs. Because the IDCs required to be charged
to capital account make up 50% of the combined
amount of IDCs chargeable to capital account and
the deductible IDCs directly borne by USP (i.e.,
$5,000 = 50% × $10,000), and because FS’s RAB
share of the total amount of IDCs in both categories is $6,000 (i.e., 60% × $10,000), $3,000 of the
$20,000 CST Payment reduces USP’s IDCs chargeable to capital account, $3,000 of the CST Payment
reduces USP’s deductible IDCs, and the remaining
$14,000 ($20,000 – $6,000) of the CST Payment is
treated as income.
(3) Example 3.
(a) Facts. The facts are the same as in Example
1, except that the $100,000 of IDCs borne by USP
consist of (1) $15,000 of IDCs incurred by USP in
the United States that are required to be charged
to capital account and amortized ratably over the
5-year applicable § 174 amortization period beginning with the midpoint of the taxable year in which
such expenditures are paid or incurred, (2) $45,000
of deductible IDCs, and (3) $40,000 of arm’s length
rental charge, as described in § 1.482-7(d)(1)(iii), for
the use of USP’s facility in the United States.
(b) Analysis. As in Example 1, of the total
IDCs of $200,000, USP’s share is $80,000 and
FS’s share is $120,000, so that FS must make a
payment to USP of $20,000. The $20,000 CST
Payment from FS to USP will first be treated as
reducing the $15,000 of IDCs that are required to
be charged to capital account and the $45,000 of
deductible IDCs pro rata to the extent of FS’s RAB
share of such IDCs. Because the IDCs required to
be charged to capital account make up 25% (that
is, $15,000 / ($15,000 + $45,000)) of the combined
amount of IDCs chargeable to capital account
and deductible IDCs directly borne by USP, and
because the deductible IDCs make up 75% (that is,
$45,000 / ($15,000 + $45,000)) of the combined
amount of IDCs chargeable to capital account and
deductible IDCs directly borne by USP, 25% of the
$20,000 CST Payment, or $5,000, reduces USP’s
IDCs chargeable to capital account, and 75%, or
$15,000, reduces USP’s deductible IDCs. Because
all $20,000 of the CST Payment is applied against
deductible IDCs directly borne by USP and IDCs
incurred by USP that are chargeable to capital
account, there is no amount of the CST Payment
that is treated as income.

SECTION 10. APPLICABILITY
DATES
.01 In general. It is anticipated that
the forthcoming proposed regulations
will provide that rules consistent with the
rules described in sections 3 through 9 of

Bulletin No. 2023–39

this notice would apply for taxable years
ending after September 8, 2023. Except
as otherwise provided in this section
10.01, prior to the publication date of the
forthcoming proposed regulations in the
Federal Register, a taxpayer may choose
to rely on the rules described in sections
3 through 9 of this notice, including for
expenditures paid or incurred in taxable years beginning after December 31,
2021, provided the taxpayer relies on all
the rules in sections 3 through 9 of this
notice and applies them in a consistent
manner. However, taxpayers may not rely
on the rules in section 7 of this notice for
SRE expenditures paid or incurred with
respect to property that is contributed to,
distributed from, or transferred from a
partnership.
.02 Additional procedural guidance. The Treasury Department and IRS
intend to issue guidance in the Internal
Revenue Bulletin (see § 601.601(d) of
the Procedural Rules) to provide procedures for taxpayers to obtain automatic
consent to change methods of accounting
to comply with this notice. Until the issuance of such procedural guidance, taxpayers may rely on section 7.02 of Rev.
Proc. 2023-24 to change their methods of
accounting under § 174 to comply with
this notice. The Treasury Department and
IRS anticipate issuing updated procedures
that will address situations in which taxpayers have, prior to the issuance of this
notice, changed methods of accounting
to comply with § 174 as amended by the
TCJA but whose treatment of SRE expenditures is not entirely consistent with this
notice. Unless specifically authorized by
the Commissioner of Internal Revenue
or by statute, a taxpayer may not request,
or otherwise make, a retroactive change
in method of accounting by filing an
amended return. See Rev. Rul. 90-38,
1990-1 C.B. 57; Rev. Rul. 2023-8, 202318 I.R.B. 801.
SECTION 11. REQUEST FOR
COMMENTS
.01 Comments regarding guidance
provided in this notice. The Treasury
Department and the IRS request comments on issues arising from the interim
guidance set forth in this notice. In addition to general comments regarding the

929

provisions of this notice, the Treasury
Department and the IRS request comments to address the following issues:
(1) Scope of § 174 (section 4 of this
notice).
(a) Whether additional guidance is
needed regarding identifying expenditures
allocable to SRE activities and allocating
such expenditures to SRE activities.
(b) Whether simplified methods or safe
harbors should be provided for identifying
expenditures allocable to SRE activities
and allocating such expenditures to SRE
activities. If so, what methods or safe
harbors should be provided? Are special
methods needed for government research
contracts?
(2) Software development (sections 4
and 5 of this notice).
(a) The definition of computer software
is based on section 2 of Rev. Proc. 200050 and § 1.197-2(c)(4)(iv). Is there a more
appropriate definition under the Financial
Accounting Standards Board Accounting
Standards Codifications (ASCs) or an
appropriate industry standard that should
be used instead? If so, what ASC or industry standard definition should be used?
Additionally, to what extent should ASC
guidance or an appropriate industry standard be used to determine activities that
are software development activities, and
costs that are software development costs,
for purposes of § 174?
(b) What examples of costs that are,
or are not, software development costs
would be helpful to include in the forthcoming proposed regulations?
(c) Are special rules and examples
needed to determine what activities
related to developing a website would be
software development?
(3) Research performed under contract
(section 6 of this notice).
(a) Should the rules for determining
whether a party to a research contract has
SRE expenditures under § 174 be similar
to the funded research rules under § 41(d)
(4)(H)?
(b) Are special rules needed for service
or manufacturing production contracts
with the government, including § 460
long-term contracts?
(c) Are there other factors that should
be considered in determining whether
a party to a research contract has SRE
expenditures?

September 25, 2023

(d) Are special rules or safe harbors
needed to determine if research performed
under a contract is foreign research (for
example, where a research recipient pays
the research provider for research that is
performed by the research provider both
inside and outside the U.S.)?
(e) Are special rules needed for contracts with related foreign research providers and recipients?
(4) Disposition, retirement, or abandonment of property (section 7 of this
notice). What, if any, changes to the rules
in section 7 of this notice are appropriate
to address potential abuses?
(5) Long-term contracts under § 460
(section 8 of this notice). In the case of
SRE expenditures allocable to long-term
contracts accounted for under the PCM
set forth in § 460, do estimated total
allocable contract costs include all SRE
expenditures that directly benefit or are
incurred by reason of the performance of
the long-term contract or, alternatively,
only that portion of the SRE expenditures expected to be amortized during
the term of the contract? Under the first
alternative, a taxpayer would be required
to report any remaining portion of the
contract price not previously reported
by the tax year following the tax year
in which the contract is completed, notwithstanding that some portion of the
SRE expenditures remain unamortized.
See § 460(b)(1).
.02 Comments regarding rules not
included in this notice. The Treasury
Department and the IRS continue to study
issues that are not addressed in this notice,
including but not limited to whether the
general requirements governing record
retention under § 1.6001-1 are adequate
for purposes of substantiating expenditures under § 174, whether the definition
of “pilot model” under § 1.174-2(a)(4)
should be amended, and whether and how
§ 59(e) applies to § 174 expenditures.
In addition to requests for comments on
these issues, the Treasury Department and
the IRS request comments on the following specific issues not addressed by this
notice:
(1) Under what circumstances should
unamortized SRE expenditures continue to be amortized or accelerated with

September 25, 2023

respect to property that is contributed to,
distributed from, or transferred from a
partnership?
(2) Under what circumstances should
unamortized SRE expenditures continue
to be amortized or accelerated with respect
to property of a partnership that is a party
to a merger, consolidation, division, or
liquidation, or that otherwise terminates
under § 708 and the regulations thereunder? Is there potential for abuse as a result
of allowing a deduction for unamortized
SRE expenditures in the final year of a
partnership that liquidates or otherwise
terminates? If so, what rules are appropriate to address such abuse?
(3) Should special rules apply to
start-up companies or small taxpayers? If
so, how should § 174 be applied in such
cases?
(4) Sections 280C(c)(1)(B) and
56(b)(2)(A) each refer to an “amount
allowable as a deduction” for qualified research expenses or basic research
expenses (in the case of § 280C(c)(1)
(B)), and § 174(a) (in the case of § 56(b)
(2)(A)). On the one hand, § 174(a)(1)
(as amended by the TCJA) does not
allow a deduction for qualified research
expenses or basic research expenses
because such expenses are required to be
charged to capital account. On the other
hand, § 174(a)(2) allows an amortization
deduction with respect to the capitalized
amount of such expenses. Should the
“amount allowable as a deduction” references in §§ 280C(c)(1)(B) and 56(b)(2)
(A) be interpreted to refer to the amortization deduction allowed under § 174(a)(2)
or to $0, which is the deduction allowed
for the qualified research expenses or
basis research expenses under § 174(a)
(1)? The Treasury Department and IRS
request comments on this interpretation
and how to resolve any potential issues
that might arise by applying the same
interpretation to both §§ 280C(c)(1)(B)
and 56(b)(2)(A).
.03 Procedures for submitting comments.
(1) Deadline. Written comments should
be submitted by November 24, 2023.
Consideration will be given, however,
to any written comment submitted after
November 24, 2023, if such consideration

930

will not delay the issuance of the forthcoming proposed regulations.
(2) Form and manner. The subject line
for the comments should include a reference to Notice 2023-63. All commenters
are strongly encouraged to submit comments electronically. However, comments
may be submitted in one of two ways:
(a) Electronically via the Federal
eRulemaking Portal at www.regulations.
gov (type IRS-2023-0040 in the search
field on the regulations.gov homepage to
find this notice and submit comments); or
(b) By mail to: Internal Revenue
Service, CC:PA:LPD:PR (Notice 202363), Room 5203, P.O. Box 7604, Ben
Franklin Station, Washington, D.C.,
20044.
(3) Publication of comments. The
Treasury Department and the IRS will
publish for public availability any comment submitted electronically or on paper
to its public docket on www.regulations.
gov.
SECTION 12. EFFECT ON OTHER
DOCUMENTS
As a result of the TCJA amendments to
§ 174 and the rules in sections 3 through
5 of this notice, section 5 of Rev. Proc.
2000-50 is obsolete.
SECTION 13. DRAFTING AND
CONTACT INFORMATION
The principal author of this notice
is Bruce Chang of the Office of the
Associate Chief Counsel (Income Tax
and Accounting). Other personnel from
the Treasury Department and the IRS participated in its development. For further
information regarding this notice, please
contact Mr. Chang at (202) 317-4870 (not
a toll-free number). For further information regarding corporate matters in section 7 of this notice, please contact Austin
Diamond-Jones of the Office of Associate
Chief Counsel (Corporate) at (202) 3175085 (not a toll-free number). For further information regarding section 9 of
this notice, please contact Annette Ofori
of the Office of Associate Chief Counsel
(International) at (202) 317-4910 (not a
toll-free number).

Bulletin No. 2023–39

Part IV
Increased Credit or
Deduction Amounts
for Satisfying Certain
Prevailing Wage and
Registered Apprenticeship
Requirements
REG-100908-23
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and public hearing.
SUMMARY: This document contains
proposed regulations regarding increased
credit or deduction amounts available for
taxpayers satisfying prevailing wage and
registered apprenticeship (collectively,
PWA) requirements established by the
Inflation Reduction Act of 2022 (IRA).
These proposed regulations would affect
taxpayers intending to satisfy the PWA
requirements for increased Federal income
tax credits or deductions. These proposed
regulations would also affect taxpayers intending to satisfy the prevailing
wage requirements for increased Federal
income tax credit amounts that do not have
associated apprenticeship requirements.
Additionally, these proposed regulations
would affect taxpayers who initially fail
to satisfy the PWA or prevailing wage
requirements and subsequently comply
with the correction and penalty procedures in order to be deemed to satisfy the
PWA or prevailing wage requirements.
Finally, the proposed regulations address
specific PWA or prevailing wage recordkeeping and reporting requirements. The
proposed regulations would affect taxpayers intending to claim increased credit or
deduction amounts pursuant to the IRA,
including those intending to make elective payment elections for available credit
amounts, and those intending to transfer
increased credit amounts. This document

also provides notice of a public hearing on
the proposed regulations.

number) or by email to publichearings@
irs.gov (preferred).

DATES: Written or electronic comments
and requests for a public hearing must be
received by October 30, 2023. A public
hearing on these proposed regulations is
scheduled to be held on November 21,
2023, at 10 a.m. ET. Requests to speak
and outlines of topics to be discussed
at the public hearing must be received
by October 30, 2023. If no outlines are
received by October 30, 2023, the public hearing will be cancelled. Requests to
attend the public hearing must be received
by 5 p.m. ET on November 17, 2023. The
public hearing will be made accessible to
people with disabilities. Requests for special assistance during the hearing must be
received by November 16, 2023.

SUPPLEMENTARY INFORMATION:

ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations
(indicate IRS and REG-100908-23) by
following the online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comments submitted to the IRS’s public docket. Send
paper submissions to: CC:PA:LPD:PR
(REG-100908-23), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, the Office of Associate
Chief Counsel (Passthroughs & Special
Industries) at (202) 317-6853 (not a tollfree number); concerning submissions of
comments or the public hearing, Vivian
Hayes at (202) 317-6901 (not a toll-free

Background
I. Overview
This document contains proposed
regulations to amend the Income Tax
Regulations (26 CFR part 1) under sections 30C, 45, 45L, 45U, 45V, 45Y, 45Z,
48C, 48E, and 179D of the Internal Revenue
Code (Code) and proposed amendments to
the Income Tax Regulations (26 CFR part
1) under sections 45Q and 48 (proposed
regulations). The Inflation Reduction Act
of 2022 (IRA), Public Law 117-169, 136
Stat. 1818 (August 16, 2022), amended
sections 30C, 45, 45L, 45Q, 48, 48C,
and 179D to provide increased credit or
deduction amounts for taxpayers who satisfy certain requirements and added sections 45U, 45V, 45Y, 45Z, and 48E to the
Code to provide new credits, which also
contain provisions for increased credit
amounts for taxpayers who satisfy certain
requirements. Increased credit amounts
are available under sections 30C, 45,
45Q, 45V, 45Y, 45Z, 48, 48C, and 48E,
and an increased deduction is available
under section 179D, for taxpayers satisfying certain prevailing wage and registered apprenticeship (PWA) requirements.
Increased credit amounts are available
under sections 45L and 45U for taxpayers
satisfying certain prevailing wage requirements.1 The IRA includes correction and
penalty provisions available in certain situations if taxpayers have failed to satisfy
the PWA requirements, and they are not
otherwise eligible for the increased credit
or deduction because they do not qualify
for an exception.
The increased credit amounts are also
generally available under sections 45, 45Y,
48, and 48E with respect to certain facilities with a maximum net output (or capacity for energy storage technology under

The increased credit provisions in sections 45L and 45U do not contain apprenticeship requirements. For simplicity, where possible, the preamble to the proposed regulations uses the acronym PWA to refer to the prevailing wage and apprenticeship requirements generally, including the prevailing wage requirements in sections 45L and 45U.
1

Bulletin No. 2023–39

931

September 25, 2023

section 48E) of less than one megawatt
(One Megawatt Exception). Additionally,
increased credit and deduction amounts
are available under sections 30C, 45, 45Q,
45V, 45Y, 48, 48E and 179D if beginning
of installation or beginning of construction (BOC) occurs before January 29,
2023 (BOC Exception).
II. Prior Guidance
On October 24, 2022, the Treasury
Department and the IRS issued Notice
2022-51, 2022-43 I.R.B. 331, requesting
comments on aspects of the increased
credits and deduction amounts enacted
by the IRA, including the PWA provisions. Section 3.01 of Notice 2022-51
requested comments regarding the applicability of subchapter IV of chapter 31
of title 40 of the United States Code,
which is commonly known as the DavisBacon Act; the special correction and
penalty procedures generally provided
for under section 45(b)(7)(B); any documentation or substantiation that should
be required to show compliance with
the prevailing wage requirements; and
any other topics relating to the prevailing wage requirements that may require
guidance. Section 3.02 of Notice 2022-51
requested comments addressing factors to
be considered in regard to the appropriate duration of employment of individuals for construction, alteration, or repair
work for purposes of the Participation
Requirement; clarification regarding the
Good Faith Effort Exception; factors to
be considered in administering and promoting compliance with the Good Faith
Effort Exception; whether methods exist
to facilitate reporting requirements for the
Good Faith Effort Exception; documentation or substantiation taxpayers maintain
or could create to demonstrate compliance
with the apprenticeship requirements or
the Good Faith Effort Exception; and any
other topics relating to the apprenticeship
requirements that may require guidance.
Comments received in response to Notice
2022-51 were considered in the drafting
of these proposed regulations.

On November 30, 2022, the Treasury
Department and the IRS published Notice
2022-61. 87 FR 73580, corrected in 87 FR
75141 (Dec. 7, 2022). Notice 2022-61 provided guidance on the PWA requirements
that generally apply under sections 30C,
45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48,
48C, and 48E, and 179D. Additionally,
Notice 2022-61 established the 60-day
period described in sections 30C(g)(1)(C)
(i), 45(b)(6)(B)(ii), 45Q(h)(2), 45V(e)(2)
(A)(i), 45Y(a)(2)(B)(ii), 48(a)(9)(B)(ii),
48E(a)(2)(A)(ii)(II) and (a)(2)(B)(ii)(II),
and 179D(b)(3)(B)(i). Specifically, Notice
2022-61 started the 60-day period applicable for determining if taxpayers qualify for
the increased credit or deduction amounts
by satisfying the BOC Exception. To be
eligible for the BOC Exception, as indicated in Notice 2022-61, taxpayers must
have begun construction or installation of
a facility (as defined in Notice 2022-61)
before January 29, 2023. Finally, Notice
2022-61 provided guidance for determining the beginning of construction under
sections 30C, 45, 45Q, 45V, 45Y, 48, and
48E, and the beginning of installation
under section 179D.
III. Inflation Reduction Act
A. In general
Prior to enactment of the IRA, the
Code provided for certain temporary credits and deductions with respect to energy
related facilities, projects, equipment,
and investments under sections 30C, 45,
45L, 45Q, 48, 48C, and 179D. Congress
had extended these provisions multiple
times and for varying types of qualified
facilities, energy projects, equipment, and
investments. The IRA further amended
these sections, generally adjusting the
credit or deduction amounts, expiration
dates, and qualifying activities. Under the
IRA, Congress also enacted new credits
under sections 45U, 45V, 45Y, 45Z, (production tax credits) and 48E (investment
tax credit).
The IRA provides increased credit or
deduction amounts that generally apply

for taxpayers who satisfy (i) certain PWA
requirements regarding the construction, installation, alteration, or repair of
a qualified facility, qualified property,
qualified project, or qualified equipment,
or with respect to certain facilities, (ii)
the One Megawatt Exception, or (iii) the
BOC Exception. Generally, if a taxpayer
satisfies the PWA requirements or meets
the One Megawatt Exception or the BOC
Exception, the amount of credit or deduction determined is equal to the otherwise
determined amount of the underlying
credit or deduction multiplied by five.
B. PWA provisions
1. In General
The principal PWA requirements are set
forth in section 45(b)(6), (7), and (8). In general, section 45(b)(6) provides the increased
credit amount for taxpayers satisfying the
PWA requirements or meeting one of the
exceptions, section 45(b)(7) provides the
prevailing wage requirements (Prevailing
Wage Requirements), and section 45(b)(8)
provides the apprenticeship requirements
(Apprenticeship Requirements).2
Section 45 provides a credit for taxpayers producing and selling electricity from
renewable resources to unrelated persons
during the taxable year (section 45 credit).
The section 45 credit is generally equal to
0.3 cents multiplied by the kilowatt hours
of electricity (i) produced by the taxpayer
from qualified energy resources and at a
qualified facility during the 10-year period
beginning on the date the facility was originally placed in service, and (ii) sold by
the taxpayer to an unrelated person during
the taxable year. If a taxpayer satisfies the
PWA requirements, the One Megawatt
Exception, or the BOC Exception, then
the credit determined under section 45(a)
for electricity produced at a qualified
facility is multiplied by five.
2. Prevailing Wage Requirements
Under section 45(b)(6), in the case of
a qualified facility that satisfies the PWA

The prevailing wage requirements in sections 30C(g), 45L(g), 45Q(h), 45U(d), 45V(e), 48(a)(10), 48C(e), and 179D(b) are substantially similar to the requirements provided under
section 45(b)(7). Sections 45Y(g)(9) and 45Z(f)(6)(A) adopt by cross-reference the Prevailing Wage Requirements under section 45(b)(7). Section 48E(d)(3) adopts by cross-reference the
Prevailing Wage Requirements under section 48(a)(10). Section 48(a)(10) provides for a special 5-year recapture rule that applies for purposes of the prevailing wage requirements with
respect to sections 48 and 48E.
2

September 25, 2023

932

Bulletin No. 2023–39

requirements of section 45(b)(7) and (b)
(8), the One Megawatt Exception, or the
BOC Exception, the credit under section
45(a) “shall be equal to such amount multiplied by five.” Section 45(b)(7)(A) provides that with respect to any qualified
facility, the taxpayer shall ensure that any
laborers and mechanics employed by the
taxpayer or any contractor or subcontractor in – (i) the construction of such facility,
and (ii) with respect to any taxable year,
for any portion of such taxable year that
is within the 10-year period beginning
on the date the qualified facility is originally placed in service, the alteration or
repair of such facility, shall be paid wages
at rates not less than the prevailing rates
for construction, alteration, or repair of a
similar character in the locality in which
such facility is located as most recently
determined by the Secretary of Labor, in
accordance with subchapter IV of chapter
31 of title 40, United States Code.
3. Correction and Penalty Related to
Failure to Satisfy Prevailing Wage
Requirements
Under section 45(b)(7)(B), a taxpayer
who is not eligible for the One Megawatt
Exception or the BOC Exception and
fails to satisfy the Prevailing Wage
Requirements under section 45(b)(7)(A) is
“deemed” to have satisfied those requirements if, for “any laborer or mechanic
who was paid wages at a rate below the
[required prevailing rate] for any period”
during any year of the construction, alteration, or repair of the facility, the taxpayer
makes a correction payment to the laborer
or mechanic and pays a penalty to the
Secretary of the Treasury or her delegate
(Secretary). Under section 45(b)(7)(B)(i)
(I), the amount of the correction payment
is the sum of (i) the difference between
the amount of wages paid to the laborer or
mechanic during the period and the amount
of wages required to be paid to the laborer
or mechanic during that period in order to
meet the Prevailing Wage Requirements;
and (ii) interest on the amount under (i) at
the underpayment rate established under

section 6621 (determined by substituting “6 percentage points” for “3 percentage points” in section 6621(a)(2)) for the
applicable period.
Under section 45(b)(7)(B)(i)(II), the
amount of the penalty is “$5,000 multiplied by the total number of laborers and
mechanics who were paid wages at a rate
below the [prevailing wage] rate described
in [section 45(b)(7)(A)] for any period”
during the year. Deficiency procedures do
not apply “with respect to the assessment
or collection” of this penalty pursuant to
section 45(b)(7)(B)(ii).
Under section 45(b)(7)(B)(iii), if the
Secretary determines that the failure to
satisfy the Prevailing Wage Requirements
is due to “intentional disregard” of those
requirements, then the correction payment
to the laborer or mechanic is three times
the amount that would otherwise be determined under section 45(b)(7)(B)(i)(I), and
$10,000 is substituted for $5,000 in calculating the penalty under section 45(b)(7)
(B)(i)(II).
Section 45(b)(7)(B)(iv) provides that,
“pursuant to rules issued by the Secretary,
in the case of a final determination by
the Secretary with respect to any failure . . . to satisfy [the Prevailing Wage
Requirements],” the correction and penalty provisions do not apply, “unless the
payments . . . are made by the taxpayer on
or before the date which is 180 days after
the date of such determination.”
4. Apprenticeship Requirements
Under section 45(b)(8), in order to
satisfy the Apprenticeship Requirements,
certain requirements with respect to
labor hours, apprentice-to-journeyworker
ratios, and participation by apprentices
must be satisfied.3
a. Labor Hours Requirement
Section 45(b)(8)(A)(i) provides that
“[t]axpayers shall ensure that, with respect
to construction of any qualified facility,
not less than the applicable percentage of
the total labor hours of the construction,

alteration, or repair work (including such
work performed by any contractor or
subcontractor) with respect to such facility shall, subject to [section 45(b)(8)(B)]
be performed by qualified apprentices”
(Labor Hours Requirement).
For purposes of the Labor Hours
Requirement, section 45(b)(8)(A)(ii) provides that the applicable percentage is: (i)
in the case of a qualified facility the construction of which begins before January
1, 2023, 10 percent, (ii) in the case of
a qualified facility the construction of
which begins after December 31, 2022,
and before January 1, 2024, 12.5 percent,
and (iii) in the case of a qualified facility
the construction of which begins after
December 31, 2023, 15 percent.
Section 45(b)(8)(E)(i) defines “labor
hours” as the “total number of hours
devoted to the performance of construction, alteration, or repair work by any
individual employed by the taxpayer or
by any contractor or subcontractor, and
exclud[ing] any hours worked by foremen, superintendents, owners, or persons
employed in a bona fide executive, administrative, or professional capacity (within
the meaning of those terms in part 541 of
title 29, Code of Federal Regulations).”
Section 45(b)(8)(E)(ii) defines “qualified apprentice” as “an individual who is
employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship
program, as defined in section 3131(e)
(3)(B).” Section 3131(e)(3)(B) defines a
registered apprenticeship program as an
apprenticeship program registered under
the Act of August 16, 1937 (commonly
known as the National Apprenticeship
Act, 50 Stat. 664, chapter 663, 29 U.S.C.
50 et seq.) that meets the standards of subpart A of part 29 and part 30 of title 29 of
the Code of Federal Regulations.4
b. Ratio Requirement
Under section 45(b)(8)(B), the Labor
Hours Requirement is subject to any
applicable requirements for apprentice-to-journeyworker ratios of the U.S.

Sections 30C(g)(3), 45Q(h)(4), 45V(e)(4), 45Y(g)(10), 45Z(f)(7), 48(a)(11), 48C(e)(6), 48E(d)(4), and 179D(b)(5) cross-reference the apprenticeship requirements in section 45(b)(8).
Sections 45L and 45U do not have apprenticeship requirements.
4
Effective November 25, 2022, 29 CFR part 29 is no longer divided into subparts A and B because subpart B (Industry Recognized Apprenticeship Programs) was rescinded in a final rule
published on September 26, 2022 (87 FR 58269).
3

Bulletin No. 2023–39

933

September 25, 2023

Department of Labor (DOL) or the applicable State apprenticeship agency (Ratio
Requirement).
c. Participation Requirement
Under section 45(b)(8)(C), each taxpayer, contractor, or subcontractor who
employs four or more individuals to perform construction, alteration, or repair
work with respect to the construction of
a qualified facility must employ one or
more qualified apprentices to perform
such work (Participation Requirement).
5. Exceptions to Apprenticeship
Requirements
a. In general
Under section 45(b)(8)(D)(i), a taxpayer is not treated as failing to satisfy the Apprenticeship Requirements
in section 45(b)(8) if: (i) the taxpayer
satisfies the requirements described
in section 45(b)(8)(D)(ii) (Good Faith
Effort Exception), or (ii) in the case of
any failure by the taxpayer to satisfy the
Labor Hours Requirement under section 45(b)(8)(A) and the Participation
Requirement under section 45(b)(8)(C),
the taxpayer makes a penalty payment
to the Secretary (Apprenticeship Cure
Provision).
b. Good Faith Effort Exception
Under the Good Faith Effort Exception
provided by section 45(b)(8)(D)(ii), a
taxpayer is deemed to have satisfied
the Apprenticeship Requirements with
respect to a qualified facility if the taxpayer has requested qualified apprentices
from a registered apprenticeship program,
as defined in section 3131(e)(3)(B), and:
(i) such request has been denied, provided that such denial is not the result
of a refusal by the taxpayer or any contractors or subcontractors engaged in the
performance of construction, alteration,
or repair work with respect to such qualified facility to comply with the established standards and requirements of the

5
6

registered apprenticeship program, or (ii)
the registered apprenticeship program
fails to respond to such request within
five business days after the date on which
such registered apprenticeship program
received such request.
c. Apprenticeship Cure Provision
Under section 45(b)(8)(D)(i)(II), if
the Good Faith Effort Exception does
not apply, then the taxpayer will not be
treated as failing to satisfy the Labor
Hours Requirement or the Participation
Requirement if the taxpayer makes a
penalty payment to the Secretary in an
amount equal to the product of $50 multiplied by the total labor hours for which
the Labor Hours Requirement or the
Participation Requirement was not satisfied with respect to the construction,
alteration, or repair work on the qualified
facility. Under section 45(b)(8)(D)(iii), if
the Secretary determines that the failure
was due to intentional disregard of the
Labor Hours Requirement or Participation
Requirement, then the penalty amount
increases to $500 multiplied by the total
labor hours for which the requirement was
not satisfied.
C. One Megawatt Exception
Under the One Megawatt Exception in
section 45(b)(6)(B)(i), a qualified facility
that has a maximum net output of less than
one megawatt (as measured in alternating
current) is eligible for the increased credit
amount. A qualified facility’s nameplate
capacity determines whether the facility meets the One Megawatt Exception.
Similar exceptions apply for a qualified
facility under sections 45Y(a)(2)(B)(i)
and 48E(a)(2)(A)(ii)(I) with a maximum
net output of less than one megawatt (as
measured in alternating current); a qualified project under section 48(a)(9)(B)(i)
with a maximum net output of less than
one megawatt of electrical (as measured
in alternating current) or thermal energy;
and energy storage technology under section 48E(a)(2)(B)(ii)(I) with a capacity of
less than one megawatt.

D. Beginning of Construction Exception
Under the BOC Exception in section 45(b)(6)(B)(ii), a qualified facility
the construction of which began prior to
the date that is 60 days after the Secretary
publishes guidance with respect to the
requirements of section 45(b)(7)(A) and
(8) is eligible for the increased credit
amount in section 45(b)(6). On November
30, 2022, the IRS and the Treasury
Department published Notice 2022-61,
providing guidance with respect to the
PWA requirements in section 45(b)(7)
(A) and (8), including initial guidance for
determining the beginning of construction for section 45 and other credits and
the beginning of installation under section 179D. Therefore, if a taxpayer began
construction or installation of a facility5
before January 29, 2023, then the taxpayer
is eligible for the increased credit amount
without satisfying the PWA requirements,
provided the taxpayer is otherwise eligible for the credit. Similar exceptions apply
under sections 30C, 45Q, 45V, 45Y, 48,
48E, and 179D.
For purposes of determining when
construction or installation begins, Notice
2022-61 incorporates by reference the
notices issued under sections 45, 45Q, and
48 (collectively, IRS Notices).6 The IRS
Notices describe two methods of establishing that construction of a facility has
begun: (i) starting physical work of a significant nature (Physical Work Test), and
(ii) paying or incurring five percent or
more of the total cost of the facility (Five
Percent Safe Harbor).
The IRS Notices, as clarified and
modified by Notice 2021-41, 2021-29
I.R.B. 17, provide that for purposes of
the Physical Work Test and Five Percent
Safe Harbor, taxpayers must demonstrate
either continuous construction or continuous efforts (Continuity Requirement)
regardless of whether the Physical Work
Test or the Five Percent Safe Harbor was
used to establish the beginning of construction. Whether a taxpayer meets the
Continuity Requirement under either test
is determined by the relevant facts and
circumstances.

Notice 2022-61 defines “facility” as qualified facility, property, project, or equipment.
Notice 2013-29, 2013-20 I.R.B. 1085 (section 45); Notice 2020-12, 2020-11 I.R.B. 495 (section 45Q); Notice 2018-59, 2018-28 I.R.B. 196 (section 48).

September 25, 2023

934

Bulletin No. 2023–39

The IRS Notices, as subsequently
clarified and modified, also provide for
a “Continuity Safe Harbor” under which
a taxpayer will be deemed to satisfy the
Continuity Requirement provided a qualified facility is placed in service no more
than four calendar years after the calendar year during which construction of
the qualified facility began for purposes
of sections 45 and 48, and no more than
six calendar years after the calendar year
during which construction of the qualified facility or carbon capture equipment
began for purposes of section 45Q. For
purposes of the Continuity Safe Harbor,
certain offshore projects and projects built
on Federal land under sections 45 and 48
satisfy the Continuity Requirement if such
a project is placed into service no more
than 10 calendar years after the calendar
year during which construction of the
project began.
Until the Treasury Department and the
IRS issue further guidance on determining
when construction or installation begins,
taxpayers may continue to rely on the
guidance provided in Notice 2022-61 and
the IRS Notices. Specifically, to determine
when construction begins for purposes of
sections 30C, 45V, 45Y, and 48E, principles similar to those under Notice 201329 regarding the Physical Work Test and
Five Percent Safe Harbor apply, and taxpayers satisfying either test will be considered to have begun construction. In
addition, principles similar to those provided in the IRS Notices regarding the
Continuity Requirement for purposes of
sections 30C, 45V, 45Y, and 48E apply.
Whether a taxpayer meets the Continuity
Requirement under either test is determined by the relevant facts and circumstances. Similar principles to those under
section 3 of Notice 2016-31 regarding the
Continuity Safe Harbor also apply for purposes of sections 30C, 45V, 45Y, and 48E.
Taxpayers may rely on the Continuity
Safe Harbor with respect to those sections,
provided the facility is placed in service
no more than four calendar years after the
calendar year during which construction
began.
For purposes of section 179D, installation of energy efficient commercial
building property has begun if a taxpayer
generally satisfies principles similar to
the two tests described in section 2.02 of

Bulletin No. 2023–39

Notice 2022-61 regarding the beginning
of construction under Notice 2013-29
(Physical Work Test and Five Percent Safe
Harbor). The relevant facts and circumstances will ultimately determine whether
a taxpayer has begun installation.
For purposes of sections 45, 45Q,
and 48, the IRS Notices will continue to
apply under each respective Code section, including application of the Physical
Work Test and Five Percent Safe Harbor,
and the rules regarding the Continuity
Requirement and Continuity Safe Harbors.
IV. Davis-Bacon Act
The Davis-Bacon Act (40 U.S.C. 3141
et seq.) (DBA), enacted in 1931, requires
the payment of minimum prevailing
wages determined by the DOL to laborers and mechanics working on contracts
entered into by Federal agencies and the
District of Columbia that are in excess
of $2,000 and are for the construction,
alteration, or repair of public buildings
and public works. The Copeland Act,
Public Law 73-324 (40 U.S.C. 3145), was
enacted in 1934 to add a requirement that
contractors working on contracts covered
by the DBA submit weekly certified payroll records to the contracting agency for
work performed on the contract. Congress
has included DBA requirements in other
laws, often referred to as the Davis-Bacon
Related Acts (Related Acts), under which
Federal agencies provide assistance for
construction projects through grants,
loans, insurance, and other methods.
The Wage and Hour Division of the
DOL is responsible for administering the
DBA and has adopted regulations for the
determination of prevailing wages as well
as compliance with and enforcement of
DBA labor standards requirements under
29 CFR parts 1, 3, and 5.
Section 3142 of the DBA requires that
Federal agencies entering into contracts
covered by the DBA include the requirements of the DBA in the contract, including
the requirement to incorporate the applicable wage determinations that set forth
the prevailing wages to be paid to laborers
and mechanics performing work, and the
Copeland Act, 40 U.S.C. 3145, sets forth
the requirement to submit certified weekly
payroll records to the contracting Federal
agency. Under regulations implementing

935

the DBA (29 CFR parts 1 and 5), the contracting agency and the Wage and Hour
Division have responsibility to ensure
compliance with prevailing wage requirements by engaging in periodic audits or
investigations of contracts, including
examination of payroll data.
The Wage and Hour Division determines the wage rates that are “prevailing”
for purposes of section 3142(b) of the
DBA for each classification of covered
laborers and mechanics on similar projects in the geographic area in which work
is to be performed. A prevailing wage is
the combination of the basic hourly rate
and any fringe benefit rate listed on the
wage determination. The Wage and Hour
Division generally makes its determinations of the prevailing rates based on
survey information provided by contractors and other interested parties. The prevailing wage determinations made by the
Wage and Hour Division are published
on the DOL-approved website for wage
determinations (currently https://www.
sam.gov).
Under the DBA, contracting agencies
follow specified procedures for incorporating wage determinations into covered
contracts. The applicable prevailing wage
determination generally applies for the
duration of the contract.
In accordance with the DBA, certain
apprentices may be paid wages at a lower
wage rate than journeyworker laborers
and mechanics. Under 29 CFR 5.5(a)(4),
an apprentice from a registered apprentice
program may be paid at not less than the
rate specified in the registered program
for the apprentice’s level of progress in
the apprenticeship program, expressed
as a percentage of the journeyworker
hourly rate specified in the applicable
wage determination. Apprentices may
also be paid bona fide fringe benefits in
accordance with the provisions of the
registered apprenticeship program, but
if the registered apprenticeship program
does not specify bona fide fringe benefits,
apprentices must be paid the full amount
of bona fide fringe benefits listed on the
wage determination for the applicable
classification.
Sections 3143 and 3144 of the DBA
also provide for certain enforcement
authority and remedies to ensure compliance with payment of prevailing wage

September 25, 2023

rates. When a contracting agency or the
Wage and Hour Division finds there has
been an underpayment of wages, the contracting agency and the Wage and Hour
Division can seek to recover the underpayments from the contractor responsible, including but not limited to the
prime contractor. If the underpayment of
wages to laborers and mechanics is not
promptly remedied, then the contracting
agency may withhold payments that are
otherwise due under the contract or under
another contract with the same prime contractor in order to compensate the laborers and mechanics for the underpayments.
Contractors who have been found to have
disregarded their obligations to employees and subcontractors, including by violating prevailing wage requirements, may
also be subject to debarment from future
Federal contracts under 40 U.S.C. 3144(b)
and 29 CFR 5.12.
Explanation of Provisions
I. Overview
A. Incorporation of certain DBA
guidance
Under section 45(b)(7)(A), the
increased credit is available with respect
to a qualified facility if a taxpayer ensures
that laborers and mechanics are “paid
wages at rates not less than the prevailing
rates. . . in accordance with [the DBA].”
The phrase “in accordance with” means
“in agreement or harmony with; in conformity to; according to.”7 In interpreting
the “in accordance with” language, the
Treasury Department and the IRS propose
to incorporate in these regulations certain
requirements of the DBA that are relevant
for the purposes of section 45(b)(7)(A)
and the intent of the IRA, and that are necessary for, and consistent with, sound tax
administration.
Under the DBA, a contractor must
agree to pay prevailing wages at the commencement of the project as a condition
of a Federal contract award. Conversely,
under section 45, the requirements related

to payment of prevailing wages are generally triggered at the beginning of construction and continue during the entire
course of a project, but the requirement
becomes binding only when a tax return
claiming the increased credit is filed. The
Code does not require taxpayers who do
not seek an increased credit under section 45(b)(6) to pay prevailing wages in
the construction, alteration, or repair of a
facility.
The proposed regulations seek to strike
the appropriate balance in determining
when DBA requirements are relevant for
purposes of the PWA requirements and
when they are not. The proposed regulations would incorporate DBA statutory
and regulatory guidance that is relevant
for purposes of claiming the increased
tax credit and consistent with sound tax
administration. For example, the proposed
regulations would largely adopt DBA
guidance relating to wage determinations
and the meaning of pertinent terms such
as “laborer” and “mechanic”; “construction, alteration, or repair”; “wages”; and
“employed”. The proposed regulations
would not adopt DBA guidance if the
result of doing so would not be in furtherance of sound tax administration or the
aims of the IRA. For example, the proposed regulations would not incorporate
the rules under the DBA regarding provisions required to be included in contracts,
those provisions related to the reporting
of certified payroll records by contractors
to contracting agencies, and the various
enforcement processes that are available
to the DOL and the contracting agencies
to address noncompliance. Additionally,
the DBA’s $2,000 monetary coverage
threshold has not been incorporated.8
The statutory language of the IRA does
not reflect any intent to include exceptions from the PWA requirements, other
than the One Megawatt Exception and
the BOC Exception. Consequently, the
Treasury Department and the IRS have not
proposed a rule exempting Tribal governments or the Tennessee Valley Authority
(TVA) from the PWA requirements in section 45. The Treasury Department and the

IRS request comments on the need for any
exceptions, including for Tribal governments or the TVA, from the PWA requirements in addition to those expressly
described in the statute. Such comments
should detail the specific circumstances
requiring the proposed exception as well
as how its design would limit its application only to those circumstances.
In addition, the Treasury Department
and the IRS will hold Tribal consultation
specifically to address the prevailing wage
and apprenticeship requirements in these
proposed regulations, which will inform
the development of the final regulations.
See part VI. of the Special Analyses
section.
B. Applicability of PWA requirements to
the taxpayer
The proposed regulations would provide that in order to earn the increased
credit under section 45(b)(6) by satisfying the PWA requirements, the taxpayer would be solely responsible for:
(i) ensuring that the relevant laborers and
mechanics are paid wages not less than the
prevailing rate whether employed directly
by the taxpayer, or by a contractor, or a
subcontractor, and (ii) ensuring that the
Apprenticeship Requirements are satisfied. The proposed regulations would
also provide that the taxpayer would be
solely responsible for the PWA recordkeeping requirements, the correction and
penalty provisions under the Prevailing
Wage Requirements, and the Good Faith
Effort Exception and penalty provisions
under the Apprenticeship Requirements.
However, nothing in these proposed regulations is intended to supersede requirements that might otherwise apply to a
taxpayer, contractor, or subcontractor by
State or Federal law.
Generally, the proposed regulations
would define the term “taxpayer” to
mean any taxpayer as defined in section 7701(a)(14), including applicable
entities described in section 6417(d)(1)
(A). This will generally be the entity
that claims the credit (as increased under

In accordance with, Oxford English Dictionary, https://www.oed.com/search/dictionary/?scope=Entries&q=in+accordance+with (last visited Aug. 8, 2023); see Accordance, MerriamWebster’s Collegiate Dictionary (11th ed. 2006) (“agreement, conformity”).
8
The Treasury Department and the IRS interpret the One Megawatt Exception as addressing small business taxpayers who would be excluded under the $2,000 minimum contract requirement
under the DBA.
7

September 25, 2023

936

Bulletin No. 2023–39

section 45(b)(6)), or makes an election
under section 6417 with respect to such
credit amount on a Federal income tax
return. The section 45 credit, including
the increased credit amount available
under section 45(b)(6), is an eligible credit
subject to the newly enacted section 6418.
Section 6418 allows “eligible taxpayers” to elect to transfer certain credits to
unrelated taxpayers rather than using the
credits against their Federal income tax
liabilities. In the case of credits transferred under section 6418, these proposed
regulations would provide that the term
“taxpayer” also means the eligible taxpayer that determines the eligible credit to
be transferred and makes a transfer election under section 6418 to transfer any
specified credit portion (including 100
percent) of an eligible credit determined
with respect to any eligible credit property
of such eligible taxpayer for any taxable
year.
Section 6418(a) provides that, in the
case of an eligible taxpayer that elects to
transfer all (or any specified portion) of
an eligible credit determined with respect
to the taxpayer for any taxable year to an
unrelated transferee taxpayer, the transferee taxpayer specified in such election
(and not the eligible taxpayer) is treated as
the taxpayer with respect to such credit (or
such portion thereof).
The Treasury Department and the IRS
published proposed regulations in the
Federal Register (88 FR 40496 (June 21,
2023)) that would implement the statutory
provisions of section 6418 (6418 Proposed
Regulations). As explained in the 6418
Proposed Regulations, the Treasury
Department and the IRS view inclusion
of the word “determined” as instructive.
Only credits determined with respect to
an eligible taxpayer can be transferred by
the eligible taxpayer. The 6418 Proposed
Regulations would provide that Code sections relating to the determination of an
eligible credit, such as sections 49 and
50(b), generally impact the amount of an
eligible credit that an eligible taxpayer can
transfer. A transferee taxpayer is generally
not subject to those Code sections, but
a transferee taxpayer is subject to Code

sections that would limit the amount of an
eligible credit that is allowed, such as sections 38(c) and 469. In making a transfer
election, the 6418 Proposed Regulations
also would require an eligible taxpayer
to report the determined credit as part
of the taxpayer’s return, including filing
properly completed credit source forms, a
properly completed Form 3800, General
Business Credit, and a schedule showing
the amount of eligible credit transferred
for each eligible credit property.
The 6418 Proposed Regulations also
would apply with respect to the entire
credit determined under section 45, where
the amount of credit determined would
include increased credit amounts available under section 45(b)(6). As the rules
for determining an eligible credit apply
to the eligible taxpayer and not the transferee taxpayer under section 6418, these
proposed regulations would provide consistency with respect to the rules relating
to the determination of the section 45
credit. Thus, while a transferee taxpayer
would claim a transferred eligible credit
(or portion thereof) on a tax return, the
requirements of section 45 relevant to
determining the credit, including the correction and penalty provisions described
in section 45(b)(7)(B) and 45(b)(8)(D),
would remain with the eligible taxpayer

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A456b3fa5576740e0. Public record. Not legal advice.