The enactment of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), has introduced significant changes to the tax treatment of research or experimental (R&E) expenditures. Revenue Procedure (Rev. Proc.) 2025-28 provides crucial administrative guidance and procedures for taxpayers to navigate these amendments, particularly concerning elections and changes in accounting methods. This article will detail the OBBBA changes addressed by this revenue procedure and outline the necessary steps and qualifications for taxpayers.

Evolution of Research or Experimental Expenditures Treatment

Before the OBBBA, the Tax Cuts and Jobs Act (TCJA) significantly altered the treatment of R&E expenditures. For amounts paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, TCJA § 174 required taxpayers to capitalize "specified research or experimental (SRE) expenditures" and amortize them ratably over a 5-year period for domestic research or a 15-year period for foreign research, starting with the midpoint of the taxable year in which the expenditures were paid or incurred. Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28, provides automatic change in method of accounting procedures for these amounts.

OBBBA Amendments to R&E Expenditures

The OBBBA has fundamentally reshaped the landscape for R&E expenditures, creating distinct treatments for foreign and domestic research.

Foreign Research or Experimental Expenditures Under Amended § 174

OBBBA § 70302(b)(1) amended TCJA § 174 such that § 174 now applies exclusively to foreign research or experimental expenditures. These expenditures continue to be amortized ratably over a 15-year period, commencing 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 introduced by OBBBA § 70302(b)(1)(C) to TCJA § 174(d) concerns 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.

Taxpayers can make an automatic change in method of accounting for foreign R&E expenditures under Rev. Proc. 2025-23, section 7.03, as modified by Rev. Proc. 2025-28. This applies to amounts paid or incurred in taxable years beginning before January 1, 2025, under TCJA § 174, and for amounts paid or incurred in taxable years beginning after December 31, 2024, under the amended § 174.

Domestic Research or Experimental Expenditures Under New § 174A

OBBBA § 70302(a) introduced new § 174A to the Code, specifically addressing domestic R&E expenditures.

Under § 174A(a), a deduction is allowed for any domestic R&E expenditures paid or incurred by the taxpayer during the taxable year, notwithstanding § 263. Domestic R&E expenditures are defined as R&E expenditures paid or incurred in connection with the taxpayer’s trade or business, other than those attributable to foreign research. Generally, these amendments apply to amounts paid or incurred in taxable years beginning after December 31, 2024.

Alternatively, § 174A(c)(1) allows taxpayers to elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months. This election applies to expenditures that would otherwise be chargeable to capital account but are not subject to depreciation under § 167 or depletion under § 611. The amortization period begins with the month in which the taxpayer first realizes benefits from such expenditures.

The election under § 174A(c) must be made by the due date (including extensions) for filing the return for the taxable year. Once made, the elected method and amortization period must be used for all subsequent taxable years, unless the Secretary’s approval is obtained for a change. This election does not apply to expenditures paid or incurred in any taxable year prior to the election year. Certain expenditures are excluded from § 174A, such as those for acquiring or improving land, property subject to § 167 or § 611, or for exploring mineral deposits. Importantly, any amount paid or incurred for software development is treated as an R&E expenditure for § 174A purposes.

For amounts paid or incurred in taxable years beginning after December 31, 2024, the changes adding § 174A are generally treated as a change in method of accounting under § 481. This change is considered initiated by the taxpayer, made with the Commissioner’s consent, and applied on a cut-off basis, with no § 481(a) adjustments. Automatic change procedures for domestic R&E expenditures under § 174A are provided in section 7.02 of Rev. Proc. 2025-23, as modified. Special transition rules exist for short 2025 taxable years.

Procedures for New § 174A(c) Election

For domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, a taxpayer may elect to capitalize and amortize all such expenditures under § 174A(c). 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 § 174A(c).
The number of months (not less than 60) selected for the amortization period.

This method, once elected, and the selected amortization period must be consistently adhered to for all subsequent taxable years unless the Commissioner’s consent to change is obtained. This election does not apply to expenditures from prior taxable years. An exception exists for a taxable year beginning after December 31, 2024, and before January 1, 2026: a taxpayer making an automatic change to the § 174A(c) amortization method under section 7.02(3)(b) of Rev. Proc. 2025-23 will be deemed to have properly made this election.

OBBBA Amendments to § 280C(c)(1)

The OBBBA also modified § 280C(c)(1). Previously, TCJA § 280C(c)(1) required a reduction in the capital account for SRE expenditures if the research credit exceeded the allowable deduction for qualified research expenses. OBBBA § 70302(b)(2)(B) amended TCJA § 280C(c)(1) to state that the domestic R&E expenditures (as defined in § 174A(b)) otherwise taken into account as a deduction or charged to capital account are reduced by the amount of the credit allowed under § 41(a). This amendment does not create any inference for the application of § 280C(c) for taxable years beginning before January 1, 2025.

It is important to note that OBBBA made no changes to § 280C(c)(2), which allows taxpayers to elect a reduced credit under § 41(a) in lieu of reducing R&E expenditures. This election remains irrevocable and must be made by the due date of the tax return (including extensions).

Transition Rules for Previously Capitalized Domestic R&E Expenditures

The OBBBA includes transition rules for domestic R&E expenditures previously subject to TCJA § 174.

General Election for Remaining Unamortized Amounts

For domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, that were capitalized under TCJA § 174, a taxpayer may elect under OBBBA § 70302(f)(2)(A) to amortize any remaining unamortized amount in one of two ways:

In full in the first taxable year beginning after December 31, 2024.
Ratably over a 2-taxable year period beginning with the first taxable year beginning after December 31, 2024.

This election is treated as a taxpayer-initiated change in method of accounting for § 481 purposes, made with the Commissioner’s consent and applied on a cut-off basis, with no § 481 adjustments. Automatic change procedures for this are provided in section 7.02 of Rev. Proc. 2025-23, as modified.

Small Business Taxpayer Retroactive Application and Elections

OBBBA § 70302(f)(1)(A) provides special rules for "eligible taxpayers", defined as any taxpayer (other than a tax shelter) that meets the gross receipts test of § 448(c) for its first taxable year beginning after December 31, 2024. The gross receipts test is met if a taxpayer’s average annual gross receipts for the three prior taxable years are $25 million or less (inflation-adjusted, which is $31 million for a taxable year beginning in 2025).

An eligible taxpayer may elect to apply § 174A (and amended § 280C) to amounts paid or incurred in taxable years beginning after December 31, 2021. This means they can deduct domestic R&E expenditures or amortize them under § 174A(c) in the taxable year they were originally paid or incurred. This is referred to as the "small business OBBBA election" or "small business retroactive method".

Manner of Making the Small Business OBBBA Election (Section 3 of Rev. Proc. 2025-28): The election is made on a timely filed (including extensions) original Federal income tax return, or on an Administrative Adjustment Request (AAR) or amended Federal income tax return, for an "applicable taxable year" (any taxable year beginning after December 31, 2021, and before January 1, 2025). This is done by attaching a statement titled "FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28" to the AAR or return. The statement must include:

Name and taxpayer identification number.
A declaration that the taxpayer is not a tax shelter for its first taxable year beginning after December 31, 2024 (with an optional declaration of intent to make the § 1.448-2(b)(2)(iii)(B) election if applicable).
A declaration that the taxpayer meets the § 448(c) gross receipts test for its first taxable year beginning after December 31, 2024.
A statement indicating whether the taxpayer is electing to deduct expenditures or amortize them under § 174A(c).
If electing amortization, a declaration that expenditures are charged to a capital account and amortized over not less than 60 months beginning when benefits are first realized, and the selected amortization period.
A declaration that the taxpayer will file an AAR or amended return for any applicable taxable year(s) for which a return was filed before September 15, 2025, if domestic R&E expenditures were paid or incurred in those years.

A small business taxpayer must carry out this election for all applicable taxable years in which it paid or incurred domestic R&E expenditures.

Due Date for Making the Election on an AAR or Amended Return: The election must be filed on or before the earlier of July 6, 2026, or the due date for filing a claim for credit or refund for such applicable taxable year under § 6511 or § 301.6511(a)-1(a)(1) (generally, three years from the time the return was filed for the 2022 taxable year). For example, for a calendar-year taxpayer who filed their 2022 return on March 1, 2023, the deadline would be April 15, 2026. For a return filed with extension on August 25, 2023, the deadline would be July 6, 2026.

Deemed Election: Solely for an original Federal income tax return for an applicable taxable year timely filed on or before November 15, 2025, a small business taxpayer will be deemed to have made this election if it deducts the domestic R&E expenditures on that original return and complies with other requirements for all other applicable taxable years.

Method Change Alternative: Under OBBBA § 70302(f)(1)(C), an eligible taxpayer may implement this retroactive application as a change in method of accounting for § 481 purposes, initiated by the taxpayer with the Secretary’s consent. Automatic change procedures for this are found in section 7.02(3)(c) of Rev. Proc. 2025-23, as modified.

Tax Shelter Determinations: For an applicable taxable year where the original return was filed on or before September 15, 2025, a taxpayer may disregard the election made under section 3.03 of Rev. Proc. 2025-28 on an AAR or amended return for purposes of determining whether it is a tax shelter for other provisions (e.g., §§ 163(j)(3), 263A(i), 448(b)(3)).

Small Business Taxpayer Late Election or Revocation of § 280C(c)(2) Election

OBBBA § 70302(f)(1)(D) permits an eligible small business taxpayer (one that has made the small business OBBBA election or the corresponding method change) to make a late election under § 280C(c)(2) or revoke a prior § 280C(c)(2) election for any "eligible prior year" (applicable taxable year for which the original return was filed on or before September 15, 2025).

Manner of Making a Late § 280C(c)(2) Election (Section 4 of Rev. Proc. 2025-28): The election is made by adjusting the research credit and domestic R&E expenditures on an AAR or amended Federal income tax return for the eligible prior year, including applicable forms like Form 3800. An amended Form 6765, Credit for Increasing Research Activities, marked "FILED PURSUANT TO SECTION 4.03 OF REV. PROC. 2025-28," must be attached, with the appropriate box checked to indicate the § 280C(c)(2) election. A statement must also be attached, including declarations about not being a tax shelter for the first taxable year after December 31, 2024, and meeting the § 448(c) gross receipts test.

Manner of Revoking a § 280C(c)(2) Election (Section 5 of Rev. Proc. 2025-28): Revocation involves similar adjustments to the research credit and R&E expenditures on an AAR or amended return. An amended Form 6765, marked "FILED PURSUANT TO SECTION 5.03 OF REV. PROC. 2025-28," must be attached, indicating the intent to revoke the election. A statement similar to that for the late election is also required.

Due Date for Late Election or Revocation: Similar to the small business OBBBA election, the late § 280C(c)(2) election or revocation must be filed on or before the earlier of July 6, 2026, or the due date for filing a claim for credit or refund for such eligible prior year under § 6511 or § 301.6511(a)-1(a)(1). A late § 280C(c)(2) election is irrevocable for that taxable year. Once a § 280C(c)(2) election is revoked, an eligible small business taxpayer may not make a late election for that same eligible prior year.

Automatic Accounting Method Change Procedures

A change in a taxpayer’s treatment of expenditures to comply with § 174 or § 174A, or to make certain OBBBA § 70302(f) elections, constitutes a change in method of accounting subject to §§ 446(e) and 481. Taxpayers generally require the Commissioner’s consent, typically obtained by filing Form 3115, Application for Change in Accounting Method. Rev. Proc. 2025-28 modifies section 7 of Rev. Proc. 2025-23 to provide automatic consent procedures.

Change for Domestic R&E Expenditures Under TCJA § 174 (Rev. Proc. 2025-23, Section 7.01)

This procedure applies to taxpayers changing their method of accounting for domestic R&E expenditures paid or incurred in taxable years beginning before January 1, 2025, to comply with TCJA § 174 or to rely on interim guidance. This includes changes from capitalizing SRE expenditures to inventoriable or depreciable property to capitalizing and amortizing them under TCJA § 174. The change is made with a modified § 481(a) adjustment (taking into account expenditures paid or incurred between December 31, 2021, and January 1, 2025) or on a cut-off basis if the adjustment is negative. Taxpayers must attach a statement to Form 3115 describing the expenditures, relevant taxable year(s), and the reason for the change. The designated automatic accounting method change number is "265".

Change to a § 174A Method for Domestic R&E Expenditures Under the OBBBA, Including Certain Transition Options (Rev. Proc. 2025-23, Section 7.02)

This section applies to taxpayers changing their accounting method for domestic R&E expenditures to comply with § 174A, or to make certain OBBBA transition changes. This includes changes to the:

§ 174A(a) deduction method for expenditures paid or incurred in taxable years beginning after December 31, 2024.
§ 174A(c) amortization method for expenditures paid or incurred in taxable years beginning after December 31, 2024.
Small business retroactive method (under OBBBA § 70302(f)(1)(C)) for expenditures paid or incurred between December 31, 2021, and January 1, 2025.
Recovery of unamortized amount method (under OBBBA § 70302(f)(2)(A)) for previously capitalized amounts from 2022-2024.

For a year of change that is the first taxable year beginning after December 31, 2024, these changes are implemented on a cut-off basis. The requirement to file Form 3115 is waived, and a statement in lieu of Form 3115 is authorized, containing specific information and declarations.

For a year of change later than the first taxable year beginning after December 31, 2024, a change to the § 174A(a) deduction method uses a modified § 481(a) adjustment, while a change to the § 174A(c) amortization method is on a cut-off basis. A statement in lieu of Form 3115 is also authorized for these changes.

The designated automatic accounting method change number is "273".

Change for Foreign R&E Expenditures (Rev. Proc. 2025-23, Section 7.03)

This procedure applies to taxpayers changing their accounting method for foreign R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, to comply with TCJA § 174 (for pre-2025) or the amended § 174 (for post-2024). Changes for expenditures paid or incurred between December 31, 2021, and January 1, 2025, are made with a modified § 481(a) adjustment or on a cut-off basis if the adjustment is negative. For the first taxable year beginning after December 31, 2024, the change is made on a cut-off basis. For all other taxable years beginning after December 31, 2024, it’s a modified § 481(a) adjustment. Form 3115 with an attachment is required. The designated automatic accounting method change number is "274".

Audit Protection

Limited audit protection is provided for these automatic changes in method of accounting. Generally, no audit protection is granted for expenditures paid or incurred in taxable years prior to the effective date of TCJA § 174 or for specific situations detailed in the revenue procedure.

Automatic Extension for Certain 2024 Tax Returns

Recognizing that many eligible taxpayers may have already filed their 2024 tax returns without the benefit of these new OBBBA elections and method changes, section 8 of Rev. Proc. 2025-28 grants an automatic six-month extension of time to file superseding tax and information returns.

This relief applies to eligible partnerships, S corporations, C corporations, individuals, trusts, estates, and exempt organizations for a 2024 taxable year that began during 2024 and ended prior to September 15, 2025, for which the due date (excluding extensions) was before September 15, 2025.

Eligibility: To qualify, the entity must have timely filed its original tax return and furnished any applicable Schedules K-1 prior to September 15, 2025, not otherwise filed for an extension, and be filing a superseding return solely for the purpose of:

Making the small business OBBBA election (section 3 of Rev. Proc. 2025-28).
Making the late § 280C(c)(2) election (section 4 of Rev. Proc. 2025-28).
Revoking a prior § 280C(c)(2) election (section 5 of Rev. Proc. 2025-28).
Making a change in method of accounting described in section 7.02(3)(c) of Rev. Proc. 2025-23, as modified (the small business retroactive method).

To take advantage of this extension, the eligible entity must file a superseding tax return (e.g., Form 1065, 1120-S, 1120, 1040, 1041, or 990-T) in the same manner as the original and write "REVENUE PROCEDURE 2025-28" at the top of the superseding return.

Conclusion

Rev. Proc. 2025-28 provides essential guidance for tax professionals and taxpayers grappling with the extensive changes introduced by the OBBBA regarding R&E expenditures. Understanding the distinct treatments for foreign and domestic R&E, the various election options for small businesses and previously capitalized amounts, and the detailed accounting method change procedures is critical for accurate compliance and effective tax planning. The automatic extension for 2024 returns offers a crucial window for affected taxpayers to avail themselves of these new provisions. All sections (3 through 6 and 8) of this revenue procedure are effective August 28, 2025. Sections 7.02 and 7.03 of Rev. Proc. 2025-23 (as modified) are effective for Form 3115s filed after August 28, 2025, with similar rules for section 7.01.

Prepared with assistance from NotebookLM.