The IRS on Thursday issued transitional guidance on the One Big Beautiful Bill’s (OBBBA) amendments to the treatment of research or experimental (R&E) expenditures under IRC § 174, clarifying how taxpayers can change their method of accounting or accounting periods to reflect the removal of the amortization requirement for domestic research. (Rev Proc 2025-28; IRB 2025-38, 8/28/2025)
Revenue Procedure 2025-28, issued August 28, addresses the separation of domestic and foreign R&E expenditures, new elections, transition relief, and accounting method changes.
Amortization vs. Immediate Expensing
Prior to the Tax Cuts and Jobs Act of 2017, Section174 allowed taxpayers to immediately deduct R&E expenditures, amortize them over a period of not less than 60 months, or capitalize them if neither of the first two options was chosen. This regime was intended to provide flexibility for businesses investing in research and development activities
Effective for tax years beginning after December 31, 2021, the TCJA required all specified research or experimental expenditures, including software development costs, to be capitalized and amortized.
Domestic R&E expenditures were subject to a five-year amortization period, while foreign R&E expenditures were subject to a 15-year period. Amortization continued even if the related property was disposed of or abandoned.
Immediate deductions are once again allowed under the OBBBA for tax years beginning after December 31, 2024, with eligible small businesses allowed to swap this effective data for December 31, 2021. This applies to small business taxpayers that meet the gross receipts test under IRC § 448(c).
As the revenue procedure explains, for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2025, “a taxpayer may elect to amortize any remaining unamortized amount with respect to such expenditures in full in the first taxable year beginning after December 31, 2024.”
Alternatively, a taxpayer may “amortize such remaining unamortized amount with respect to such expenditures ratably over the 2-taxable year period beginning with the first taxable year beginning after December 31, 2024,” the IRS said.
Foreign R&E expenditures remain subject to the 15-year amortization requirement.
Making an Election
To make an election for amortized domestic R&E expenditures, taxpayers must attach a statement to their timely filed return for the year the election is made. The election is binding for the year made and all subsequent years unless the taxpayer obtains IRS consent to change the method or period.
Automatic consent is provided for accounting method changes to comply with the new rules. In certain cases, taxpayers may file a statement in lieu of Form 3115, Application for Change in Accounting Method.
The statement must include the following information:
- a general description of the type of domestic research or experimental expenditures included as “specified” expenditures;
- the year or years in which the expenditures subject to the change were paid or incurred by the applicant; and
- a declaration that provides the reason for which the applicant is changing its method of accounting.
Elections must be made by July 6, 2026, subject to the statute of limitations for refund claims under IRC § 6511. While the statute says the deadline is one year after the enactment of the OBBBA (July 4), that day falls on a Saturday, meaning taxpayers have the weekend to make their elections.
The revenue procedure is effective August 28, 2025, for most provisions, with special rules for method changes filed before November 15, 2025. Taxpayers who filed 2024 returns before September 15, 2025, without an extension, may file a superseding return by the extended due date to make or revoke elections or change methods under the new rules.
For more on the treatment of specified R&E expenditures, see Checkpoint’s Federal Tax Coordinator FTC 2d ¶ L-3102.
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