Rev. Proc. 2026-32, September 4, 2026

The Department of the Treasury and the Internal Revenue Service (IRS) issued Revenue Procedure 2026-32 to provide updated administrative and procedural rules for taxpayers seeking to change their federal tax accounting methods. Specifically, this guidance modifies Section 7 and Section 19 of Revenue Procedure 2025-23, which lists the automatic accounting method changes for which the Commissioner’s consent is deemed granted. The revenue procedure is designed to facilitate compliance with statutory changes made to Internal Revenue Code (IRC) Section 174 and Section 460 by the One, Big, Beautiful Bill Act (OBBBA).

Revenue Procedure 2026-32 governs the administrative mechanisms by which taxpayers may transition their tax treatments of research or experimental (R&E) expenditures and residential construction contracts. For R&E expenditures, the ruling covers both “specified research or experimental expenditures” (SRE expenditures) paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, under TCJA Section 174, as well as domestic R&E expenditures governed by Section 174A after OBBBA’s enactment. For long-term construction contracts, the procedure establishes rules for residential and home construction contracts entered into in taxable years beginning after July 4, 2025.

Reasons for Issuance by the Internal Revenue Service

The issuance of Revenue Procedure 2026-32 was necessitated by successive, major statutory changes that disrupted traditional tax accounting methods. Under the Tax Cuts and Jobs Act (TCJA) of 2017, former IRC Section 174 was amended to require taxpayers to charge all SRE expenditures to a capital account. These capitalized costs were subject to mandatory amortization “ratably over a 5-year period in the case of SRE expenditures attributable to domestic research, or a 15-year period in the case of SRE expenditures attributable to foreign research”. This mandatory capitalization rule applied to all taxable years beginning after December 31, 2021.

However, the enactment of the One, Big, Beautiful Bill Act (OBBBA) on July 4, 2025, retroactively shifted this landscape. OBBBA Section 70302(b)(1) amended Section 174 such that it “applies only to foreign research or experimental expenditures”, which continue to require 15-year amortization. Concurrently, OBBBA Section 70302(a) added IRC Section 174A, which restored the immediate deduction of “domestic research or experimental expenditures that are paid or incurred by the taxpayer during the taxable year”, effective for taxable years beginning after December 31, 2024.

Furthermore, the OBBBA significantly altered long-term construction contract accounting under Section 460. Historically, IRC Section 460(a) required taxpayers to account for long-term contracts using the percentage-of-completion method (PCM), with narrow exceptions under Section 460(e) for “home construction contracts” and certain small construction contracts. “Residential construction contracts” that did not qualify as home construction contracts were restricted to the percentage-of-completion/capitalized-cost method (PCCM) under former Section 460(e)(4), requiring 70 percent of the contract items to be accounted for under the PCM and 30 percent under an exempt contract method.

OBBBA Section 70430(a)(1)(A) amended Section 460(e)(1)(A) to “extend the home construction contract exception... to apply to all residential construction contracts”, effectively exempting all residential construction contracts from the PCM. At the same time, OBBBA Section 70430(a)(2) repealed former Section 460(e)(4), “thereby eliminating the ability to use the percentage-of-completion/capitalized-cost method for residential construction contracts”. Because these amendments are effective for contracts entered into in taxable years beginning after July 4, 2025, the IRS issued Revenue Procedure 2026-32 to provide transition protocols, automatic consent, and administrative waivers for taxpayers adjusting to these statutory changes.

IRS Analysis of Governing Law

The IRS’s legal analysis rests on the interplay between statutory accounting method change requirements and the specific statutory provisions of Sections 174, 174A, 460, and 263A. Under IRC Section 446(e) and Treasury Regulation Section 1.446-1(e)(2)(i), “a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner”. This consent must be secured “whether or not such method is proper or is permitted under the Internal Revenue Code or the regulations thereunder”. Generally, this requires filing Form 3115, Application for Change in Accounting Method, during the taxable year of change. However, Section 1.446-1(e)(3)(ii) “authorizes the Commissioner to prescribe administrative procedures under which taxpayers will be permitted to change their method of accounting”, including the terms and conditions necessary to “prevent amounts from being duplicated or omitted”.

When an accounting method change occurs, IRC Section 481(a) requires that “there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted”. These adjustments are typically taken into account over a period prescribed by the Commissioner. For changes to comply with TCJA Section 174 or OBBBA Sections 174 and 174A, the IRS analyzed these transitions as “a change in method of accounting to which §§ 446(e) and 481, and the corresponding regulations, apply”.

For construction contracts, a change from the PCM or PCCM to an exempt contract method (such as the completed contract method (CCM) under Treasury Regulation Section 1.460-4(d)) is also recognized as an accounting method change under Section 446(e). Under Section 460(e)(1), as amended by the OBBBA, residential construction contracts are exempt from the PCM but are subject to IRC Section 263A capitalization “unless (i) the taxpayer estimates at the time the contract is entered into that the contract will not be completed within the 2-year period... (3-year period... for residential construction contracts that are not home construction contracts), and (ii) the taxpayer meets the gross receipts test of § 448(c)”. A change to start or stop capitalizing costs under Section 263A for these contracts is a change in accounting method to which Sections 446(e) and 481 apply.

Application of the Law to the Procedural Facts

Revenue Procedure 2026-32 applies the statutory rules by establishing automatic consent procedures under Section 446(e) for both research expenditures and residential construction contracts. The procedure modifies the List of Automatic Changes in Revenue Procedure 2025-23 by defining the following transition mechanics:

Research and Experimental Expenditures under Sections 174 and 174A

For taxpayers changing their accounting methods to comply with TCJA Section 174 for pre-2025 expenditures, Section 3.01 of the revenue procedure mandates that the change “is made with a modified § 481(a) adjustment that takes into account only expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025”.

The IRS coordinates this change with the OBBBA transition options. Specifically, “if the taxpayer previously changed to the recovery of unamortized amounts method described in section 7.02(2)(f) of this revenue procedure for a prior taxable year, the § 481(a) adjustment for the change under this section 7.01 must reflect application of the taxpayer’s recovery of unamortized amount method”.

If a taxpayer implements concurrent changes—both the Section 7.01 change and the recovery of unamortized amount change—for its first taxable year beginning after December 31, 2024, the “§ 481(a) adjustment period for any net positive § 481(a) adjustment... is the same amortization period elected by the taxpayer under the recovery of unamortized amount method”. This allows the taxpayer to take the positive adjustment into account “either in full in the first taxable year beginning after December 31, 2024, or ratably over the 2-taxable year period”. If the transition was made in a prior year, the adjustment is taken over the “amortization period that remains under the taxpayer’s recovery of unamortized amount method”.

Recognizing that successive accounting method changes are normally restricted under the general automatic change rules, the IRS applied administrative relief: “The eligibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 2015-13... do not apply to a change described in section 7.01(1)(a)... for any taxable year beginning before January 1, 2028”. A taxpayer is also permitted to make this change “for which it has used an impermissible method of accounting for only one taxable year”.

Similarly, for foreign research expenditures under Section 7.03, the IRS removed the limitation that restricted changes to taxable years beginning before January 1, 2026, and extended the Section 5.01(1)(d) and (f) eligibility waivers to any taxable year beginning before January 1, 2028.

Residential Construction Contracts under Section 460(e)

For long-term contracts, the IRS implemented two primary modifications. First, it modified Section 19.01 of Revenue Procedure 2025-23 to allow automatic consent for a taxpayer “to stop capitalizing costs under § 263A for residential construction contracts described in § 460(e)(1)(A), as amended by the OBBBA, that meet the requirements of § 460(e)(1)(B)(i) and (ii)”. The designated automatic accounting method change number for this change is “236”.

Second, Section 4.02 of the revenue procedure adds a new Section 19.03 to Revenue Procedure 2025-23. This section provides automatic consent for residential construction contracts entered into in taxable years beginning after July 4, 2025, to change:

“From the percentage-of-completion method of accounting described in § 1.460-4(b) or the percentage-of-completion/capitalized-cost method of accounting described in § 1.460-4(e) to an exempt contract method of accounting described in § 1.460-4(c)”; or
“To start capitalizing costs under § 263A for contracts that do not meet the requirements of § 460(e)(1)(B)(i) and (ii)”.

The designated automatic accounting method change number for this newly added change is “275”.

In terms of procedural design, the IRS determined that both construction contract method changes (changes “236” and “275”) must be implemented on a cut-off basis. Under a cut-off implementation, the new method “applies only to contracts entered into on or after the first day of the year of change... Accordingly, a § 481(a) adjustment is neither permitted nor required”.

Furthermore, to minimize administrative burdens, the IRS enacted a reduced filing requirement for both changes, specifying that “a taxpayer is required to complete only... the identification section of page 1... the signature section... Part I; Part II, all lines except line 16; Part IV, line 25; and Schedule D, Part I” on Form 3115. The IRS also waived the Section 5.01(1)(d) and (f) eligibility rules of Revenue Procedure 2015-13 for the taxpayer’s first or second taxable year beginning after July 4, 2025.

Finally, the IRS provided a generous transition rule for Section 19.03 changes. If a taxpayer filed a federal income tax return on or before September 21, 2026, for a taxable year beginning after July 4, 2025, and “properly applied the methods of accounting... for such taxable year”, they are “deemed to have complied with the general procedures under § 446(e), § 1.446-1(e), and this section 19.03”.

Practical Considerations for Tax Practitioners

For tax professionals, Revenue Procedure 2026-32 represents a critical window of opportunity to align client accounting methods with the highly favorable expensing rules under Section 174A and PCM exemptions under Section 460(e).

When analyzing client R&E portfolios, practitioners must rigorously separate domestic and foreign research expenses, as “SRE expenditures attributable to foreign research” continue to face a mandatory 15-year capitalization and amortization period under Section 174, while domestic expenditures enjoy immediate expensing under Section 174A(a). If a client previously used an impermissible method, the practitioner can leverage the waiver of the five-year prior change limitations under Revenue Procedure 2015-13, which is available until tax years beginning before 2028.

For construction clients, practitioners must review all multi-unit residential projects entered into after July 4, 2025. Taxpayers are no longer forced to use the complex PCCM (70/30) method. Practitioners can automatically transition these contracts to an exempt contract method, such as the completed contract method, under automatic change number “275”. However, practitioners must carefully evaluate the Section 263A capitalization requirements. If a contract is exempt from the PCM but does not meet the small taxpayer criteria under Section 460(e)(1)(B) (e.g., due to failing the Section 448(c) gross receipts test or the 3-year completion estimate), Section 263A capitalization must be initiated using change number “275” on a cut-off basis.

IRS Conclusions and Administrative Efficiencies

In conclusion, the IRS has recognized the significant administrative disruptions caused by the rapid succession of the TCJA and the OBBBA. By modifying Revenue Procedure 2025-23, the Commissioner has provided a pragmatic, automatic framework that balances statutory enforcement with taxpayer relief.

The primary conclusions of the IRS are reflected in the design of these automatic changes:

Permitting cut-off treatment for construction contract changes, thereby avoiding the heavy administrative burden of calculating retroactive Section 481(a) adjustments on open contracts.
Establishing reduced Form 3115 filing requirements, which drastically shortens the compliance process for small business contractors.
Providing eligibility waivers through 2028 for Section 174 and Section 174A changes, ensuring that taxpayers who made recent method changes are not locked out of complying with the OBBBA’s retroactive changes.

These procedures represent a highly cooperative approach by the Service to ensure rapid compliance with the OBBBA while minimizing the friction of transition.

Prepared with assistance from Gemini Notebook.