OBBBA Procedural Guidance for Research Expenses

On Aug. 28, the IRS issued Revenue Procedure 2025-28, advising taxpayers how to make various elections, file amended or superseding returns, and change accounting methods for R&E expenses under the new Section 174A enacted by the OBBBA.

Background

For tax years beginning before 2022, Section 174 allowed taxpayers to either deduct R&E expenses currently or capitalize and amortize them over at least 60 months.

Beginning in 2022 tax years, the Tax Cuts and Jobs Act of 2017 (TCJA) required taxpayers to capitalize and amortize domestic R&E expenditures over five years and foreign R&E expenditures over 15 years.

Section 174A reinstates the ability to immediately deduct domestic R&E expenses or, at the taxpayer’s election, amortize them over a minimum of 60 months for tax years beginning after Dec. 31, 2024. Foreign R&E expenditures remain subject to Section 174 and the 15-year amortization requirement, with no deduction allowed upon disposition, retirement, or abandonment.

Revenue Procedure 2025-28 now provides the procedures taxpayers must follow to adopt these statutory changes, including elections, method changes, and amended return filings.

Automatic method changes to comply with OBBBA

Revenue Procedure 2025-28 provides the following automatic method changes to comply with the statutory changes, which generally are effectuated by attaching a statement in lieu of a Form 3115, “Application for Change in Accounting Method,” to the timely filed original return for the year of change.

• Change to immediately deduct domestic R&E under Section 174A(a): If the change is made for the first taxable year beginning after Dec. 31, 2024, it is made on a cutoff basis (applies to domestic R&E incurred during and after the year of change). If the change is made for a 2025 tax year that is later than the first taxable year beginning after Dec. 31, 2024, it is made with a modified Section 481(a) adjustment (applies to domestic R&E incurred in taxable years beginning after Dec. 31, 2024).
• Change to capitalize and amortize domestic R&E under Section 174A(c): This change is made on a cutoff basis and once made, must be applied consistently unless changed with IRS consent.
• Election to deduct remaining unamortized balance of domestic R&E previously capitalized under the TCJA: Taxpayers may elect to deduct such amounts either entirely in their first tax year beginning after Dec. 31, 2024, or ratably over the two-taxable-year period beginning with the first taxable year beginning after Dec. 31, 2024. This election generally must be made as a method change for the taxpayer’s first taxable year beginning after Dec. 31, 2024. However, if a taxpayer filed a federal income tax return on or before Sept. 15, 2025, for a 2025 tax year without making this election, then the taxpayer may make the election via a method change for a later 2025 tax year, including a modified Section 481(a) adjustment.

Taxpayers that filed their federal income tax return on or before Sept. 15, 2025, for a tax year beginning after Dec. 31, 2024, are deemed to have complied with the procedures for making these method changes, as applicable, if they either:

• Properly deducted domestic R&E expenses in accordance with Section 174A(a)
• Properly capitalized and amortized domestic R&E in accordance with Section 174A(c) and reported such amortization on Form 4562, “Depreciation and Amortization”

Additionally, such taxpayers are deemed to comply with the procedures if they amortized the remaining unamortized balance of domestic R&E previously capitalized under the TCJA either entirely in such year or ratably over the two-taxable-year period.

Special rules for eligible small businesses

Eligible small businesses may elect to retroactively apply Section 174A to domestic R&E paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025. However, such an election also requires the taxpayer to retroactively apply Section 280C(c), as amended by the OBBBA, which requires taxpayers to reduce the deduction or amounts capitalized under Section 174A by the amount of the research and development (R&D) credit claimed under Section 41 unless the taxpayer elects to claim the reduced R&D credit under Section 280C(c)(2).

Crowe observation

Retroactive application of Section 174A could come at a significant cost: a permanent reduction to R&E expenses or R&D credits claimed. Taxpayers should carefully model the net impact of all the required changes before making this election.

An eligible small business is a taxpayer that is not a tax shelter and that meets the gross receipts test under Section 448(c) for its first tax year beginning after Dec. 31, 2024 (less than $31 million average annual gross receipts over the three prior tax years). Revenue Procedure 2025-28 provides the procedural rules for such taxpayers to make this election, which include the following options:

• Combination of amended returns, original returns, or administrative adjustment requests (AARs), as applicable: Taxpayers applying this option must do so for all 2022-2024 tax years by attaching a statement to the amended or original return or AAR, as appropriate. A retroactive election is deemed to be made for returns filed on or before Nov. 15, 2025, that otherwise comply with the requirements of making the election. Such eligible taxpayers filing an amended return or AAR also may make a late reduced-credit election under Section 280C(c)(2) or revoke a prior election. In no event may these returns or AARs be filed any later than the earlier of July 6, 2026, or the date the statute of limitations expires with respect to such tax year.
• Accounting method change for a tax year beginning before Jan. 1, 2025: This change is made by attaching a statement in lieu of a Form 3115 to an original return filed after Aug. 28, 2025. The method change must include a Section 481(a) adjustment.

Eligible small-business taxpayers that timely filed a tax return before Sept. 15, 2025, and that did not otherwise file for an extension are granted an automatic six-month extension to file a superseded tax return solely for the purpose of following this procedural guidance.

Looking ahead

Revenue Procedure 2025-28 provides clarity on how to implement the statutory changes to Sections 174 and 174A, but it also creates an immediate need for action. As income tax provision and year-end planning is underway, taxpayers should consult their tax adviser to engage in proactive planning to secure benefits under the new rules and avoid missed opportunities.