New Guidance Released on §174 Changes under the OBBBA

On August 28, the IRS released Rev. Proc. 2025-28, which provides procedures for making certain elections related to the treatment of domestic research and experimental (R&E) expenditures under the One, Big, Beautiful Bill Act (OBBBA).  The guidance modifies Section 7 of Rev. Proc. 2025-23 with respect to the associated changes in methods of accounting.

What Changed with OBBBA

The OBBBA created a new §174A, which allows all taxpayers to either expense 100% of domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024, or amortize these expenditures over a period of not less than 60 months, beginning with the month when benefits are first realized.  Foreign R&E expenditures remain subject to 15-year amortization.

In addition to current year expensing being available beginning in tax year 2025, all taxpayers may now elect to accelerate the deduction of unamortized domestic R&E expenses incurred after December 31, 2021 and before January 1, 2025, over 1 or 2 years, starting in 2025.  This is treated as an automatic change in method of accounting and may be effectuated using Form 3115 or a statement in lieu of a Form 3115.

Special Provisions for Small Businesses

Small business taxpayers (average annual gross receipts of $31M or less) have additional options regarding the treatment of expenses incurred after December 31, 2021 and before January 1, 2025, and the Rev. Proc. 2025-28 provides guidance for how to proceed with each option.

First, OBBBA small businesses may elect to amend prior returns or file an administrative adjustment request (AAR) to retroactively apply §174A to tax years beginning after December 31, 2021 and before January 1, 2025.  The election must be made in the form of a statement attached to the amended return/AAR and must be carried out consistently for all applicable tax years.  The election must be filed on or before July 6, 2026, or the expiration of statute of limitations, whichever is earlier.

Small businesses making this election for 2022 and 2023 will be deemed to have made an election to apply §174A for the 2024 taxable year on their timely filed original return, allowing for full expensing on this year’s return.

Alternatively, small business taxpayers may opt to make a change in method of accounting for 2024 with a modified cut-off §481(a) adjustment.

As an additional benefit, small businesses that choose to amend prior year returns may also elect or revoke the reduced research credit under §280C(c)(2) for any applicable tax year.

Taxpayers who have already filed their 2024 returns may file superseding returns by the extended due date to apply the provisions of Rev. Proc. 2025-28.

Small Businesses Choosing Expensing – A Few Scenarios

For Small Businesses fully expensing 2024 expenses on the original return:

• Method change via Statement – Make the method change via the statement (as outlined in the guidance) in lieu of a Form 3115 and include the 481(a) adjustment on the Tax Year 2024 tax return to capture the remaining unamortized expenses from Tax Years 2022-2023.
• Deemed Election – Fully expense on the original 2024 return and amend Tax Years 2022 & 2023 (on or before July 6, 2026, or the expiration of statute of limitations, whichever is earlier). Must include the statement on the Tax Years 2022 & 2023 returns, which will be deemed an election for 2024.

Alternatively, for Small Businesses not fully expensing 2024 expenses on the original return:

• Form 3115 – Capitalize the Tax Year 2024 expenses in the same manner as Tax Years 2022-2023 and capture the unamortized expenses from Tax Years 2022-2024 on the 2025 return or 2025-2026 returns (and prepare a Form 3115).

If you have questions about what this means for your business or the businesses you serve, please reach out to one of our tax specialists.