[co-author: Joelle Vilinsky]
On August 28, 2025, the Internal Revenue Service (IRS) issued Revenue Procedure 2025-28, providing procedural guidance for taxpayers on the treatment of research and experimental (R&E) expenditures[1] under I.R.C. § 174. The Rev. Proc. reflects significant changes brought about by § 70302(f) of Public Law 119-21, commonly referred to as the One Big Beautiful Bill Act (OBBBA), including the reintroduction of the option to deduct R&E expenditures through a change in the method of accounting under I.R.C. § 446(a).
This post outlines the historical development of I.R.C. § 174 prior to Pub. L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), the amendments enacted under the TCJA, and the modifications made by the OBBBA, before turning to Rev. Proc. 2025-28 and the guidance it provides under the updated framework.
History of Section 174
Pre-TCJA
Historically, expenses relating to long-life assets, such as R&E expenses, were required to be capitalized.[2] However, under the Internal Revenue Code of 1954,[3] I.R.C. § 174[4] was enacted “to eliminate the need to distinguish research from business expenses for deduction purposes, and to encourage taxpayers to carry on research and experimentation activities.”[5] Businesses were also permitted to elect to amortize R&E expenditures over 60 months, reflecting Congress’s promotion of R&E activities through preferential tax treatment, enabling businesses to tailor the treatment of R&E expenses to their financial position and tax planning strategies.
TCJA
TCJA drastically revised I.R.C. § 174 by eliminating the flexibility afforded under prior law. Under the TCJA, for tax years that began after December 31, 2021, businesses were required to capitalize and amortize domestic R&E expenditures over 60 months and foreign R&E expenditures over 15 years.[6] This change was not well received by businesses,[7] as it increased taxable income by delaying deductions to future years. The mismatch between the year that the expenditure was incurred and the year in which the expenditure was deducted resulted in reduced cash flow due to increased taxes, adversely affecting the cash flow of companies with substantial R&E investments, such as startups and tech companies.
OBBBA
Largely reversing the mandatory capitalization rules imposed by the TJCA, OBBBA reintroduced some of the flexibility I.R.C. § 174 previously afforded.[8] OBBBA reinstated the election that allowed taxpayers to fully deduct domestic R&E expenditures after December 31, 2024, beginning with the month in which the benefit from the expenditure is first realized.[9] Further, in a perfunctory attempt to undo the harm caused by TCJA,[10] OBBBA allowed qualified small business taxpayers to retroactively elect to immediately deduct R&E expenses in prior years when such deductions were disallowed.[11]
Revenue Procedure 2025-28 Provides Guidance on How to Make an Election Under the Revised I.R.C. § 174
Simplified Election Procedures
Rev. Proc. 2025-28 introduces streamlined procedures for taxpayers to change how they treat R&E expenditures. Normally, a change in accounting method requires IRS approval by filing Form 3115.[12] Under the new guidance, taxpayers have been granted automatic consent to make these changes. Beginning after December 31, 2024, businesses can switch to either immediate deduction or amortization of domestic R&E expenses by attaching a short statement to their federal income tax return.[13]
A taxpayer who elects to capitalize and amortize domestic R&E expenditures must attach a statement “FILED PURSUANT TO SECTION 6.02 OF REV.PROC. 2025-28” with their federal income tax return for the taxable year to which the election applies.[14] The election statement must include:
- Name and EIN of the taxpayer;
- Taxable year in which the election is made;
- A declaration that the application is charging such expenditures to a R&E 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 expenses; and
- The number of months selected for the amortization period.
Once elected, this method applies to all subsequent years unless IRS consent is obtained.
Transition Rules for TCJA-Capitalized Costs
For domestic R&E expenditures that were capitalized under the TCJA for tax years 2022 through 2024, taxpayers may elect to recover remaining unamortized costs in 2025.[15] Taxpayers can either deduct the full balance in the first taxable year beginning after December 31, 2024, or spread the recovery ratably over two taxable years. This election, which is also done with IRS Form 3115, is treated as a taxpayer-initiated accounting method change, made with automatic IRS consent, and applied on a cut-off basis.[16]
Small Business Retroactive Election and Late or Revoked §280C Election
To ease the burden TCJA placed on small businesses, OBBBA allows qualified small business taxpayers to retroactively deduct domestic R&E expenditures for any tax year beginning after December 31, 2021, and before January 1, 2025.[17] To do so, they must attach a statement titled “FILED PURSUANT TO SECTION 3.03 OF REV.PROC. 2025-28” to a timely filed tax return, amended return, or administrative adjustment request (AAR).[18] The election must be applied consistently for all affected years, and filed on or before the earlier of July 6, 2026, or the due date for filing a claim for credit or refund under the statute of limitations.
Eligible small businesses may also make late §280C(c)(2) elections or revoke prior elections for applicable years.[19] Such changes may be made through amended returns or AARs. Filing deadlines follow the same rules as the small business retroactive election.
Automatic Extension for 2024 Returns
Taxpayers who timely filed 2024 returns may file superseding returns within six months to take advantage of the new rules.[20] Superseding returns must be clearly marked “REVENUE PRCOEDURE 2025-28” and include the same attachments and statements required for the original election.[21]
Conclusion
Rev. Proc. 2025‑28 provides critical guidance and streamlined procedures for taxpayers navigating the changes to I.R.C. § 174 under the OBBBA. By reinstating the ability to deduct domestic R&E expenditures, offering small businesses the ability to retroactively apply these deductions, and simplifying accounting method changes, Congress, with the IRS’s assistance, has begun the process of rectifying one of the provisions of the TCJA that was hostile to businesses.
[1] Generally, the Internal Revenue Code (I.R.C.) refers to amounts expended by businesses as expenses. See e.g., I.R.C. §§ 162(a) (“ordinary and necessary expenses”) and 212 (“ordinary and necessary expenses”). The deduction under I.R.C. § 174 refers to the expenses as “research and experimental expenditures” and the credit under I.R.C. § 41 generally refers to them as “research expenses”. For purposes of consistency and because we are discussing I.R.C. § 174, they will be referred to as “research and experimental expenditures” or “R&E expenditures”.
[2] Joint Comm. on Taxation, General Explanation of Public Law 99-514, JCS-10-87 (1987), citing H. Rpt. No. 1337, 83d Cong., 2d Sess. at 28 (1954); S. Rpt. 1622, 83d Cong., 2d Sess. At 33 (1954); Snow v. Comm’r, 416 U.S. 500 1974 (citing Congressional intent to encourage research by both “oncoming” and “ongoing” businesses).
[3] Pub. L. 83-591.
[4] Then numbered I.R.C. § 201(d)(9)(B).
[5] Joint Comm. on Taxation, General Explanation of Public Law 99-514, JCS-10-87 (1987).
[6] The 15-year amortization period begins in the midpoint of the business’s taxable year, thereby essentially forcing the amortization period into a 16th year. I.R.C. § 174(a)(2)(B).
[7]Jennifer Williams-Alvarez, A Tax Rule Change Is Threatening the Survival of Some Businesses, W.S.J, https://www.wsj.com/articles/the-tax-rule-change-that-is-threatening-businesses-survival-a9236658 (Oct. 24, 2023); John Buchanan, Major Changes Coming in 2022 to §174 Deduction of Research Expenses, WOLTERS KLUWER, https://www.wolterskluwer.com/en/expert-insights/major-changes-coming-in-2022-to-174-deduction-of-research-expenses (June 23, 2021).
[8] The 15-year capitalization rule for foreign R&E under I.R.C. § 174(a)(2)(B) remains.
[9] I.R.C. § 174A(c)(1)(B).
[10] As this 2025 is now the fourth year with the amortization rules, the early-year damage has largely been mitigated for 2025 through the delayed deductions. As such, this additional deduction is likely to be little more than a way to lower tax rate rather than actually dealing with the issues caused by the change in TCJA.
[11] Pub. L. 119-21, § 70301(f)(1)(A).
[12] We use “approval” in the loosest of senses, as consent for most changes in accounting methods using IRS Form 3115 are automatic.
[13] Switching to amortization would occur only after the taxpayer has been deducting R&E expenses immediately.
[14] Rev. Proc. 2025-28, § 6.02.
[15] Pub. L. 119-21, § 70302(f)(2)(A).
[16] Rev. Proc. 2025-28, § 7.01.
[17] Pub. L. 119-21, § 70302(f)(1)(A).
[18] Rev. Proc. 2025-28, § 3.03.
[19] Rev. Proc. 2025-28, §§ 4.03, 5.03.
[20] Rev. Proc. 2025-28, § 8.02.
[21] Rev. Proc. 2025-28, § 8.05.
