The One Big Beautiful Bill Act (OBBB) significantly changed the way research and experimental (R&E) expenditures were to be treated under the Tax Cuts and Jobs Act of 2017 (TCJA). Under the TCJA, R&E expenditures paid or incurred after Dec. 31, 2021, and before Jan. 1, 2025, were required to be capitalized and amortized over a 5-year or 15-year period, depending on whether they were domestic or foreign related, respectively. OBBB provides that domestic R&E expenditures can now be expensed in the year incurred or capitalized over a 5-year period if a taxpayer elects to do so. 

Since the passage of OBBB, taxpayers have been awaiting guidance from the IRS and Department of Treasury (Treasury) on how to implement these new provisions on returns filed in 2022, 2023, and 2024 as well as returns yet to be filed for the 2024 tax year. On Aug. 29, Treasury released Revenue Procedure (Rev. Proc.) 2025-28 which provides this much-awaited guidance for taxpayers on how to make various elections, file amended or superseding returns, and change accounting methods related to R&E expenditures.

Elections

Small business election to retroactively apply to Section 174A

Small businesses (SBT) may elect to deduct or amortize domestic R&E expenditures by attaching an election statement to a timely filed 2024 tax return (including extensions) or an amended 2022 or 2023 tax return. Amended tax returns must generally be filed by July 6, 2026. Alternatively, SBTs may elect to amortize R&E expenditures over a period of 60 months. SBTs electing to deduct in 2024 must then amend their 2022 and/or their 2023 return to take the deduction. 

Small business election not to retroactively apply Section 174A

SBTs may elect to continue pre-TCJA treatment of R&E expenditures – meaning, they will continue to capitalize and amortize applicable costs over either 5 or 15 years if foreign. If a SBT elects to treat its R&E expenditures in this way for 2024, the taxpayer must file a Form 3115 for the first tax year beginning after Dec. 31, 2024, to change its accounting method for the treatment of R&E expenditures from capitalizing and deducted to expensing in the year paid or incurred.

Small business taxpayer election under Section 280(c)(2)

Under TCJA, excess Section 41(a) credits reduced deductible or capitalized R&E amounts. Post-OBBB, for tax years beginning after Jan. 1, 2025, all domestic R&E expenditures under Section 174A(b) must be reduced by the full Section 41(a) credit, regardless of whether they are deducted or capitalized. Taxpayers may still elect under Section 280C(c)(2) to reduce the credit instead of reducing R&E costs. 

Changes in methods of accounting

Adopting Section 174A for R&E expenditures incurred before Dec. 31, 2024 – SBTs only

In addition to the election mentioned above, SBTs can file a method change on a timely filed 2024 tax return or superseded tax return on or before the extended due date for the applicable type of entity to recover the remaining basis of section 174 costs capitalized in 2022 and 2023.

Adopting Section 174A for R&E expenditures incurred after Dec. 31, 2024 – all taxpayers

Beginning in 2025, taxpayers may need to shift from capitalizing domestic R&E expenditures to deducting them as paid or incurred. Rev. Proc. 2025-28 updates the prior guidance in Rev. Proc. 2025-23 to allow an automatic method to change for this transition, covering expenditures paid or incurred in tax years beginning after Dec. 31, 2024.
Taxpayers – including SBTs that did not elect to expense R&E costs retroactively via Section 174A(c) or file a 2024 method change –  have two options for R&E capitalized in tax years beginning after 2021 and before 2025. They can either take a full deduction of the remaining basis in the first taxable year beginning after Dec. 31, 2024, or spread that deduction evenly over 2025 and 2026. 

Superseded returns

Many taxpayers may have filed 2024 tax returns either before OBBB was passed or Rev. Proc. 2025-28 was released. For these taxpayers, Rev. Proc. 2025-28 provides relief. If an eligible entity’s 2024 tax return was filed before Sept. 15, 2025, an automatic extension is granted until Sept. 15, 2025 to file a superseding tax return that applies the provisions of Rev. Proc. 2025-28.  The relief providing for a superseding return enables SBTs only to re-file a 2024 tax return on or before Sept. 15, 2025 and attach the election statement to effectuate the immediate deduction of R&E expenditures pursuant to Section 174A(c) or file the method change mentioned above. 

What does CohnReznick think?

While the guidance provided in Rev. Proc. 2025-28 is welcomed by many taxpayers, the provisions are complex and must be examined with specific taxpayer facts in mind. Whether you are deciphering if deducting R&E expenditures in 2024 and amending prior tax returns is the correct option or just trying to be compliant with the new regulations and guidance, we recommend contacting your tax advisor for more information and to evaluate your options.

^{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}