IRS Issues Guidance on Research and Experimental Expenditures Under OBBBA

On August 28, 2025, the Internal Revenue Service (IRS) issued Revenue Procedure 2025-28, providing procedures for making elections under the significant changes to the treatment of domestic research or experimental (R&E) expenditures under the One Big Beautiful Bill Act (OBBBA). The guidance provides instructions on how to make various elections, file amended returns, or change accounting methods for R&E expenditures as provided under the OBBBA. It also includes transitional rules, modifies Revenue Procedure 2025-23, List of Automatic Changes, and grants an extension of time for taxpayers impacted by the OBBBA changes to file superseding 2024 federal income tax returns.

Brief History of R&E Expenditures

Before the OBBBA changes, treatment of R&E expenses was most recently crafted by the Tax Cuts and Jobs Act (TCJA) of 2017, which required the capitalization of “specified” R&E expenses paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025. Internal Revenue Code Section 174 under the TCJA required all domestic R&E expenses to be amortized over five years and all foreign R&E expenses amortized over 15 years. Revenue Procedures provided that an automatic change in accounting method would be provided for these changes. The “specified” R&E expenditures included costs incurred for the development or improvement of a product, process, or software. This included a broader scope of expenses than the Qualified Research Expenditures (QREs) used to calculate the federal R&D tax credit.

IRS Guidance – New IRC Section 174A – Domestic R&E

New Section 174A allows taxpayers to deduct domestic R&E expenditures paid or incurred in connection with their trade or business in taxable years beginning after December 31, 2025. Alternatively, taxpayers can elect to capitalize and amortize domestic R&E expenses over a period of not less than 60 months. This election applies to expenses that are not subject to depreciation or depletion and must be made by the due date, including extensions, for filing the tax return for the taxable year. Once the election is made, the method and amortization period must be used for all subsequent tax years, unless a change is approved by the Secretary.

The changes proscribed by the new Section 174A are generally treated as a change in accounting methods initiated by the taxpayer, made with the Commissioner’s consent, and applied on a cut-off basis with no adjustment required under Section 481(a).

New Section 174A Election Procedure – Domestic R&E

The Revenue Procedure includes the procedure for electing to amortize R&E expenses under the new Section 174A. This election is made by attaching a statement, titled FILED PURSUANT TO SECTION 6.02 OF REV. PROC. 2025-28, to the taxpayer’s original federal income tax return for the first taxable year to which the election applies, by its due date, including extensions. The statement must include:

• The name and taxpayer identification number of the applicant.
• The taxable year in which the election is being made.
• A declaration that the applicant is charging such expenditures to a research or experimental capital account and amortizing the amount over a period of not less than 60 months, beginning with the month in which the applicant first realizes benefits from such expenditures, in accordance with Section 174A(c).
• The number of months (not less than 60) selected for the amortization period.

Generally, this election does not apply to expenditures from prior taxable years.

Amended Section 174 for Foreign R&E Expenses 

The OBBBA amended Section 174 such that it now only applies to foreign R&E expenditures. These expenditures continue to be amortized over a 15-year period, beginning with the midpoint of the taxable year in which they are paid or incurred. Foreign R&E expenditures are defined as those paid or incurred in connection with the taxpayer’s trade or business that are attributable to foreign research. These amendments are generally effective for amounts paid or incurred in taxable years beginning after December 31, 2024.

A significant change to Section 174(d) addresses the disposition of property related to foreign R&E expenditures. If such property is disposed of, retired, or abandoned during its amortization period, no deduction or reduction to the amount realized is permitted, and the amortization deduction for those expenditures continues. This specific amendment applies to property disposed, retired, or abandoned after May 12, 2025.

Revenue Procedure 2025- 28 modifies Revenue Procedure 2025-23 to allow an automatic change in method of accounting for foreign R&E expenditures. This applies to amounts paid or incurred in taxable years beginning before January 1, 2025, under Section 174 from the TCJA, and for amounts paid or incurred in taxable years beginning after December 31, 2024, under Section 174, as amended by the OBBBA.

Automatic Accounting Method Change Procedures

Revenue Procedure 2025-28 modifies Revenue Procedure 2025-23 to provide automatic consent procedures for various accounting method changes related to R&E expenditures:

1. A change to currently deduct, under IRC Section 174A(a), domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024;
2. A change to capitalize and amortize, under IRC Section 174A(c), domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024;
3. A change to retroactively apply, in the case of a small-business taxpayer, IRC Section 174A for domestic research or experimental expenditures paid or incurred during the TCJA period; and
4. A change to accelerate (over either one or two tax years) the remaining amortization of domestic research or experimental expenditures that were previously capitalized under TCJA IRC Section 174.

For the first taxable year beginning after December 31, 2024, taxpayers may use statements in place of Form 3115, Application for Change in Accounting Method, for certain accounting method changes, with simplified procedures and waived duplicate filing requirements.

Relief for Previously Filed Returns

Revenue Procedure 2025-28 grants an automatic six-month extension for eligible taxpayers to file superseding returns for 2024 taxable years. This relief is available to taxpayers who filed returns before September 15, 2025, without extensions, and need to make elections or method changes provided by this Revenue Procedure.

The extension applies to partnerships, S corporations, C corporations, individuals, trusts, estates, and exempt organizations with 2024 taxable years ending before September 15, 2025, where the original due date was before September 15, 2025.

Small Business Planning Note 

It seems like the purpose of the small business retroactive method change described in item (c) in automatic changes above is to provide an automatic method change for small business taxpayers that have already filed their original return for 2024. Meanwhile, the purpose of the six-month extension is to provide a method for taxpayers: (a) on extension for 2024, or (b) who want to facilitate the change with an amended return. The automatic change method is preferrable for those who have already filed because it keeps them from having to amend. Taxpayers should keep in mind, however, that a 481(a) adjustment would be required with this automatic change method. Both methods should have the same numerical result, but the automatic method merely provides a way for taxpayers to avoid amending if they’ve already filed for 2024.

Reaction to Guidance 

This guidance has been well received by the tax profession. Brady Bryan, Principal at Ryan, remarked: “This is incredibly taxpayer-favorable guidance from the IRS. We’re excited about the clarity it brings and are already talking to clients daily about how to harness every opportunity outlined in the procedure. It’s a game-changer for businesses and in innovation.”

Derek Gimbel, Manager at Ryan, commented: “This guidance is especially helpful for small businesses and eligible small businesses (ESBs). It simplifies compliance and opens the door for less administrative complexity. It’s a meaningful step toward making innovation incentives more accessible.”

Effective Date

Most provisions of Revenue Procedure 2025-28 are effective August 28, 2025. The modified automatic change procedures apply to Forms 3115 filed after August 28, 2025, with transition rules for taxpayers who properly filed duplicate copies before November 15, 2025.

Please contact our Ryan tax professionals for assistance applying these procedures.

TECHNICAL INFORMATION CONTACTS: 

Brady Bryan
Principal
Ryan
213.627.1719
brady.bryan@ryan.com

Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com

Derek Gimbel
Manager
Ryan
202.897.3067
derek.gimbel@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.