The Latest IRS Guidance on Section 174

Summary: The IRS’s Rev. Proc. 2025-28 provides procedures for taxpayers to apply the new rules for §174 costs introduced by the OBBB Act.

Background

The One Big Beautiful Bill (OBBB) Act significantly altered the tax treatment of domestic research and experimental (R&E) expenditures by amending §174 so that the capitalization requirements only apply to foreign R&E expenditures and by creating §174A to govern domestic R&E expenditures. Under the new rules, domestic R&E expenditures can be fully deducted in the year incurred while foreign expenditures must be capitalized and amortized over 15 years (read more about these changes here). In addition to these code changes, the OBBB Act established new transition rules for applying the changes, including one that allows eligible small businesses the option to amend prior year returns and apply the changes retroactively, and another that allows all businesses the option to accelerate the deduction of the remaining unamortized amount of domestic R&E from the 2022 – 2024 tax years over the next one or two tax years.

After the introduction of these new rules, significant uncertainty remained regarding the processes and procedures for applying these rules, including uncertainty around filing requirements and administrative processes. Revenue Procedure (Rev. Proc.) 2025-28, released August 28, 2025, alleviates some of this uncertainty by providing a procedural framework for how taxpayers can apply the new rules.

A Summary of the Guidance

Rev. Proc. 2025-28 serves as an operational manual, translating statutory mandates into actionable steps for taxpayers to follow. It specifically details the choices taxpayers must make on their returns, also known as “elections,” which are usually a matter of checking a box, filing a statement, or otherwise notifying the IRS that a taxpayer wants to apply a certain option allowed by law. The Rev. Proc. spells out exactly how to make these elections with respect to the new §174 rules and applicable transition guidance.

Guidance for Changes in Accounting Method

One area clarified by the Rev. Proc is how taxpayers can make an election to change their method of accounting when applying the OBBB Act changes. An accounting method primarily relates to when a business recognizes certain types of income or expense for tax purposes. Since taxpayers are generally required to treat similar types of income and expense consistently over multiple tax periods, they traditionally are required to receive permission from the IRS prior to changing to a different permissible accounting method.

Seeking permission to change an accounting method is typically performed via the filing of Form 3115 with the IRS; however, in the case of major law updates that impact large groups of taxpayers, like the OBBB Act, the IRS will often provide a more simplified and streamlined method to apply for “automatic consent.” Such is the case with Rev. Proc. 2025-28, which provides a streamlined approach specific to each of the new R&E accounting methods introduced in the new legislation.

Notably, the procedures differ for domestic R&E costs incurred during the 2022-2024 tax years and domestic R&E costs that are incurred during the 2025 tax year and beyond, as detailed below:

• For Domestic R&E Costs Incurred During the 2022 – 2024 Tax Years
  • Small Business Retroactive Method – the option for small businesses electing to retroactively apply OBBB Act rules to tax years after December 31, 2021.
  • Recovery of Unamortized Amount Method – the option for non-small businesses and small businesses not electing retroactive treatment to deduct all remaining unamortized domestic R&E expenditures either in 2025 or ratably over 2025 and 2026.
• For Domestic R&E Costs Incurred During the 2025 Tax Year and Beyond
  • §174A(a) Deduction Method – the option for deducting domestic R&E expenses as they are paid or incurred, for taxable years beginning after December 31, 2024.
  • §174A(c) Amortization Method – the option to capitalize domestic R&E expenditures and amortize over a period of not less than 60 months, as selected by the taxpayer, beginning with the first month in which the taxpayer received benefits from the R&E expenditure, for taxable years beginning after December 31, 2024.

Businesses with §174A costs will need to determine which of the available permissible accounting methods are best aligned with their tax planning goals, and make the applicable election(s) via a statement attached to the tax return. The Rev. Proc. clarifies what information will need to be provided for each of the methods above.

Guidance for Small Business Taxpayers Choosing to Amend

Taxpayers eligible to elect the Small Business Retroactive Method include eligible small businesses (other than tax shelters) with average annual gross receipts under $31 million for the three tax years preceding 2025. Additional guidance for determining if a taxpayer qualifies as a small business is available if a taxpayer had a short-period tax return during this period.

For taxpayers that meet this eligibility requirement and choose to apply the Small Business Retroactive Method, the Rev. Proc. provides the following guidance:

• The OBBB Act rules must be applied retroactively to all applicable tax years between 2022 and 2024; taxpayers cannot apply the rules only to selected tax years.
• Eligible taxpayers choosing to amend must file all amended returns by the earlier of the following dates: either by July 6, 2026, OR by three years after the original return was filed. Therefore, a 2022 tax return filed before July 4, 2022, has a shorter time to file amended returns than those filed later in the year.
• Eligible taxpayers that deduct domestic R&E expenditures on an original and timely filed 2024 return filed before November 15, 2025, will be considered to have made a deemed election for retroactive treatment and they must attach the relevant election statement to their 2024 tax return. They also must apply the same retroactive treatment to all other applicable tax years.
• Eligible taxpayers are permitted to file superseded returns by the applicable extended due date for 2024 tax returns that have already been timely filed. Taxpayers that timely filed their 2024 tax return without filing an extension are also eligible to file superseded returns by the applicable extended due dates if they are superseding their 2024 tax return to retroactively apply the OBBB Act §174A rules to their 2024 return.
• A change in accounting method statement is not required to be included in the 2025 return for eligible taxpayers that properly elected the Small Business Retroactive Method on their 2024 tax returns.
• Eligible taxpayers that elect the Small Business Retroactive Method also have the option either to make a late §280C(2) election for the reduced R&D credit or revoke a previous §280C(2) election made on its originally filed 2022, 2023, and 2024 tax returns. Taxpayers that revoke or choose not to make a §280C(2) election must reduce their domestic §174 deduction or capitalized amount by the amount of the gross R&D credit. There are additional statements and forms that should be included with amended tax returns where a taxpayer is either making a late §280C(2) election or revoking a previously made §280C(2) election.

Takeaways for Taxpayers

Businesses with §174 expenditures, especially those that have been negatively impacted by the tax treatment of such expenditures over the past several years, will find significant relief through this recent IRS guidance. For small businesses, the opportunity to apply the new law retroactively could mean tax refunds for prior years. For larger companies, the new law can help expedite relief by accelerating unamortized amounts over the next one or two years. The Rev. Proc. provides the information and procedures necessary to take advantage of these opportunities.

The nuances around eligibility for certain methods and identifying which method is actually the most advantageous for your business may require the help of a knowledgeable advisor. As was explored in a previous article, just because small businesses can amend prior years returns doesn’t necessarily mean that they should. Additionally, understanding the filing procedures and how to remain compliant with the law and the latest Rev. Proc. is best left to an experienced professional.

Final thoughts: Have a Plan for your §174 Compliance

Rev. Proc 2025-28 is the IRS’s latest effort to help taxpayers make the most of the new §174 rules. While more guidance is expected in the future, we now have much-needed clarity on how to appropriately make §174-related elections on future and amended tax returns, including the steps and information required for small businesses to apply the law changes retroactively.

Nonetheless, significant complexity still exists for appropriately calculating and identifying §174 costs for tax filing purposes, and rigorous tax planning exercises will be crucial to achieve the most advantageous and compliant results.