Procedural Guidance for Treatment of R&E Expenditures Under §174A 

Overview 

The IRS has released Revenue Procedure 2025-28, which provides new guidance for how taxpayers should handle research and experimental (R&E) expenses under Section 174A, a part of the new One, Big, Beautiful Bill Act (OBBBA).  

Key Takeaways from Revenue Procedure 2025-28 

Topic	Small Business Taxpayers1	Large Business Taxpayers
Retroactive Application:	Available for 2022-2024	Not available
Election Deadline:	July 6, 2026	N/A
Method Change:	Optional for 2024 or Required for post-2024 years	Required for post-2024 years

 

Detailed Breakdown of the Revenue Procedure 

Section 1: Purpose and Scope 

This section establishes the procedures for making elections and accounting method changes under OBBBA, allowing for automatic consent for changes related to Sections 174 and 174A.

Section 2: Background and Definitions 

This section provides key definitions for understanding the revenue procedure, including the treatment of domestic and foreign R&E expenditures and the impact of changes to Section 280C.

Section 3: Small Business Retroactive Election 

This section details the rules for small business taxpayers to retroactively apply Section 174A.  A “small business taxpayer” for this election, is “any taxpayer, other than a tax shelter under Section 448(d)(3) and Treas. Reg. Section 1.448-2(b)(2), that meets the gross receipts test under Section 448(c) for their first taxable year beginning after December 31, 2024. The gross receipts test under IRC § 448(c) is satisfied if a taxpayer’s average annual gross receipts for the three-tax-year period preceding the testing year do not exceed $31 million for tax years beginning in 2025, with the threshold adjusted annually for inflation.

• Filing Requirements:
• An eligible small business taxpayer can make this election on a timely-filed original or superseded 2024 tax return, or on an amended return filed by July 6, 2026.

• Method: The election is made by attaching a statement to the return. This approach is in lieu of a Form 3115.

• Retroactivity: A key part of this election is that it must be applied to all applicable tax years. This means that if a taxpayer makes the election on their 2024 return, they are also required to file amended returns for their 2022 and 2023 tax years, if applicable. These amended returns must be filed by the earlier of the July 6, 2026 deadline or the applicable statute of limitations for those years.

• Consequence: If a taxpayer makes this election, they are not permitted to use the other automatic method changes described in Section 7.02. 

Sections 4 & 5: Late or Revoked Section 280C(c)(2) Election 

These sections provide procedures for small businesses to handle their Section 280C(c)(2) elections, which are often tied to the research credit. 

• What is a Section 280C(c)(2) Election?This election allows a taxpayer to take a reduced research credit instead of having their deduction for research expenses reduced. This prevents the taxpayer from receiving a “double benefit”—both a deduction for the expenses and a full credit. The reduced credit is calculated as the full credit amount minus the credit multiplied by the top corporate tax rate.

• Late Election: Section 4 allows small business taxpayers to make a late Section 280C(c)(2) election for prior tax years. This must be done by July 6, 2026, by filing an amended return or an Administrative Adjustment Request (AAR) and including a specific declaration.

• Revocation: Section 5 provides a similar mechanism for small business taxpayer to revoke a previously made Section 280C(c)(2) election for an eligible prior year. This also must be done by the July 6, 2026 deadline, using a specific statement attached to an amended return or AAR. 

Section 6: Election to Capitalize and Amortize 

This section provides the procedure for all taxpayers to choose to capitalize and amortize their domestic R&E expenses under Section 174A(c). This election is for tax years beginning after December 31, 2024.

• Method: To make this election, a taxpayer must attach a statement to their original federal income tax return for the year of the election. This statement must be clearly marked with the required reference to Revenue Procedure 2025-28. 

• Required Information: The statement must include the taxpayer’s name, ID, the applicable tax year, a declaration of the capitalization and amortization election, and the specific amortization period chosen (which must be at least 60 months). 

• Automatic Method Change: Taxpayers who adopt the Section 174A(c) capitalization method via an automatic accounting method change under Section 7.02(3)(b) are considered to have properly made this election.

Section 7: Automatic Method Changes 

Section 7 of Revenue Procedure 2025-28 modifies existing guidance to provide automatic consent for a range of accounting method changes related to R&E expenditures. The section introduces three new designated automatic change numbers.  

Section 7.01 – Domestic Research Expenditures under TCJA Section 174 (Change #265) 

This part of the guidance is for taxpayers who need to switch their accounting method for domestic research expenditures to comply with the Tax Cuts and Jobs Act (TCJA). It applies to taxpayers who may have been treating these expenses as inventoriable or depreciable property.

• Change: Taxpayers can now change to the required method of capitalizing and amortizing these expenses over a five-year period. 

• Adjustment: This change can be implemented using a modified Section 481(a) adjustment or on a cut-off basis. 

• Form: A Form 3115 is required for this change. The designated automatic change number is 265. 

Section 7.02 – Domestic Research Expenditures under Section 174A (Change #273) 

This section is for taxpayers adopting the new rules under Section 174A.  

Change: This section covers four distinct method changes, and a taxpayer might need to adopt more than one of them:

1. Section 174A(a) Deduction Method: Allows taxpayers to immediately deduct domestic Section 174 expenses. 
2. Section 174A(c) Amortization Method: Allows taxpayers to capitalize and amortize domestic Section 174 expenses over a period of 60 months or more. 
3. Small Business Retroactive Method: This method allows a small business taxpayers to retroactively expense their R&D costs. The taxpayer can “catch up” on previously capitalized expenses by including them in a modified Section 481(a) adjustment.²  
4. Recovery of Unamortized Amount Method: This change allows taxpayers to decide how to recover any remaining unamortized expenses from prior years. The taxpayer can choose to recover the full amount in 2025 or ratably over two years (2025 and 2026). 

• Adjustment: These changes are made on a cut-off basis with the exception of the Small Business Retroactive Method which is made on a modified cut-off basis. 

• Form: A statement may be filed in lieu of a Form 3115. The designated automatic change number is 273. 

Section 7.03 – Foreign Research Expenditures under TCJA Section 174 and OBBBA (Change #274) 

This section provides an automatic method change for handling foreign research expenditures. 

• Change: Taxpayers can change their method to amortize foreign R&E expenses over a 15-year period, as required by the TCJA and modified by the OBBBA. 

• Adjustment: Similar to domestic expenditures, this change can be made using a modified Section 481(a) adjustment or on a cut-off basis. 

• Form: This change requires a Form 3115 with detailed attachments. The designated automatic change number is 274. 

Section 8: Superseding Returns 

This section grants an automatic six-month extension to eligible small business taxpayers who filed their 2024 returns early without an extension. This allows them to file a superseding return to make elections or method changes under the new OBBBA provisions. To qualify, the superseding return must be clearly marked “REVENUE PROCEDURE 2025-28.”

Action Items 

Small Business Taxpayers: Act Now to Review Retroactive Options 

• Determine eligibility based on the first tax year ending after December 31, 2024:
  • Confirm you meet the gross receipts test under Section 448(c)
  • Confirm you are not a tax shelter under Section 448(d)(3) and Treas. Reg. Section 1.448-2(b)(2)

• Choose a Small Business Retroactive Option: 

• • Retroactive Election: Fully deduct all domestic R&E expenses back to 2022 by filing amended returns. 

• • Retroactive Method Change: Deduct unamortized R&E expenses from 2022-2023 on your 2024 tax return via a modified Section 481(a) adjustment. 

• Deadlines: The deadline for these changes on your 2024 return is the extended due date. If you filed early, a superseding return can be filed. 

Large Business Taxpayers and Small Business Taxpayers Who Do Not Elect A Retroactive Option: Prepare for 2025 

• Mandatory Changes: For your first tax year starting after December 31, 2024, you must choose an accounting method for R&E expenses: either immediate deduction or amortization over at least 60 months. 

• Prior-Year Expenses: You can also elect to recover any remaining unamortized R&E expenses from 2022-2024 either fully in 2025 or over 2025 and 2026. 

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[1] A small business taxpayer as defined in Section 3 of the Rev. Proc. A large business taxpayer are those taxpayers that do not meet the definition of a small business taxpayer.

[2] The Revenue Procedure contains inconsistencies regarding the applicable tax year for adopting this method. However, it appears that Treasury intends to permit taxpayers to adopt the method in a tax year beginning before December 31, 2024, by following the procedural guidance outlined in the Revenue Procedure for tax years beginning after that date.