November 5, 2025 | By: Eric Lucas, Partner, Complex Tax Accounting Methods and Elections

Summary

For tax years that begin after December 2024, the One Big Beautiful Bill Act (OBBBA) creates new section 174A(a), which permits taxpayers to deduct domestic research and experimental (R&E) expenditures in the year they are paid or incurred. As an alternative, section 174A(c) allows taxpayers to elect to capitalize and amortize domestic R&E costs over a period of not less than 60 months, beginning in the year that the taxpayer first realizes a benefit from the expenditures. The IRS recently issued Rev. Proc. 2025-28, which provides procedural steps that are available to all taxpayers to comply with section 174A, and provides additional options that are available only to small business taxpayers. The following provides a summary of those procedures.

Procedures Available to All Taxpayers

  • For R&E costs capitalized and amortized under the Tax Cuts and Jobs Act (TCJA) in years prior to 2025, a taxpayer may (1) continue to amortize the costs over the remainder of the 5-year period, or (2) deduct the entire unamortized balance in 2025 or spread it over two years (2025 and 2026). A taxpayer that chooses to recover the unamortized balance must change its method of accounting by filing a statement (in lieu of Form 3115) with the 2025 tax return.
  • For R&E costs incurred in taxable years that begin in 2025, a taxpayer may (1) change its method of accounting to deduct domestic R&E costs in the year incurred, or (2) elect to capitalize and amortize domestic R&E costs over a period of not less than 60 months, beginning with the year in which the taxpayer first realizes a benefit from the costs.The second option may be more restrictive in that it appears to apply to all domestic R&E costs in the year of the election and future years. For either option, a taxpayer must file a statement (in lieu of Form 3115) with the 2025 tax return.

    Note that a section 59(e) election (to selectively capitalize and amortize R&E costs over 10 years) may provide more flexibility than an all-or-nothing election to capitalize and amortize under section 174A(c).

Additional Procedures for Small Business Taxpayers

Rev. Proc. 2025-28 provides small business taxpayers with additional options for implementing section 174A. A small business taxpayer is a taxpayer whose average annual gross receipts (including receipts from controlled group members) for the prior three years (2022, 2023, and 2024) are $31 million or less. For R&E costs capitalized and amortized under the Tax Cuts and Jobs Act (TCJA) in years prior to 2025, small business taxpayers may retroactively apply the OBBBA R&E deduction method under section 174A(a) or the OBBBA R&E amortization method under section 174A(c) for all applicable years (generally 2021 through 2024) using one of the approaches below:

  1. Attaching a statement to the original and amended tax returns (or AAR) for all applicable tax years (2021-2024) by the earlier of July 6, 2026, or expiration of the statute of limitations for an applicable tax year. If a small business chooses to use the OBBBA deduction method, it must use that method for all applicable years and may not selectively amend a particular year. A small business taxpayer may be able to change to the OBBBA amortization method for an applicable year subsequent to the year an OBBBA deduction method was used but would have to use the amortization method for all R&E costs incurred in years subsequent to that election.
    a. If a small business taxpayer timely filed its 2024 return before September 15, 2025, and did not request an extension, the IRS provided an automatic extension of time to make the election on a superseding return. If a small business taxpayer changed and began deducting section 174A(a) costs on its 2024 return without including an election or filing a method change, it would be required to amend pre 2024 TCJA years to reflect the deduction method.
    b. Note that a small business taxpayer that chooses to retroactively apply section 174A must retroactively apply the OBBBA’s changes to section 280C. Thus, the taxpayer must reduce the amount of the research credit under section 41 for those years or make a late reduced research credit election under section 280C(c)(2).
  2. File an automatic method change for 2024 and recover the unamortized balance of capitalized R&E costs through a section 481 (catch-up) adjustment on the 2024 return. Small business taxpayers that use this approach must file the statement (in lieu of Form 3115) in accordance with the automatic consent procedures.

Final Consideration

The options available for complying with section 174A should be carefully considered, as the choices made to comply may result in collateral consequences that may be difficult to change in future periods.