IRS Issues New Guidance on Research and Experimental Expenditure Accounting Method Changes

The Internal Revenue Service (IRS) recently announced modified accounting method change procedures for specified research or experimental (SRE) expenditures, providing crucial updates for businesses navigating complex tax requirements. The new guidance, primarily outlined in Revenue Procedure 2025-28, offers taxpayers automatic consent to change accounting methods for SREs and introduces new elections, particularly impacting the treatment of costs incurred during the Tax Cuts and Jobs Act (TCJA) period and beyond.

This latest move by the IRS, which also modifies Revenue Procedure 2025-23 and grants an extension of time for filing superseding 2024 Federal income tax returns for various entities, comes on the heels of significant legislative changes. The Tax Cuts and Jobs Act of 2017 fundamentally altered the landscape for deducting research and experimental expenditures under Internal Revenue Code Section 174. Prior to January 1, 2022, businesses could elect to either immediately deduct all R&E costs in the year paid or incurred, or amortize them over a period of no less than 60 months. The TCJA eliminated this flexibility, mandating that all SREs paid or incurred in taxable years beginning after December 31, 2021, must be capitalized and amortized over five years for domestic research and experimentation, and 15 years for foreign R&E, with amortization beginning at the mid-point of the year the cost was incurred.

The shift to mandatory amortization represented a substantial departure from previous practice for many taxpayers, often necessitating a change in accounting method. The IRS had previously issued guidance, including Revenue Procedure 2023-8 (modifying Rev. Proc. 2022-14), to facilitate these automatic changes, assigning Designated Automatic Change Number (DCN) 265 for this purpose.

Revenue Procedure 2025-28 builds upon these previous announcements, incorporating changes for SRE expenditures that were previously detailed in Rev. Proc. 2024-34 (for taxpayers with short taxable years in 2022 and 2023) and Rev. Proc. 2025-8 (expanding options for 2024 taxable years). The new guidance is largely driven by Section 70302 of the One, Big, Beautiful Bill Act (OBBBA), Public Law 119-21, enacted July 4, 2025, which provides a framework for these elections and method changes.

For the “TCJA Period” — tax years beginning after December 31, 2021, and before January 1, 2025 — Revenue Procedure 2025-28 provides automatic consent for taxpayers to change their accounting methods to comply with TCJA Section 174 or to rely on interim guidance previously issued in Notices 2023-63 and 2024-12. This is a critical provision for businesses that have been grappling with the new amortization rules since 2022.

Looking forward, for tax years beginning after December 31, 2024, the Revenue Procedure outlines new options under IRC Section 174A. Taxpayers can now elect to currently deduct domestic research or experimental expenditures (the IRC Section 174A(a) deduct method) or to capitalize and amortize them (the IRC Section 174A(c) amortization method). This reintroduces a degree of flexibility that was absent under the initial TCJA mandates for recent years.

Small-business taxpayers receive specific relief under the new guidance, with a provision allowing them to retroactively apply IRC Section 174A for domestic R&E expenditures paid or incurred during the TCJA Period. Additionally, the guidance includes a method for the recovery of unamortized amounts for domestic R&E under OBBBA Section 70302(f)(2)(B). These provisions are particularly beneficial for smaller entities that may have faced significant cash flow challenges due to the mandatory amortization requirements.

The IRS also included important transitional rules. Taxpayers, including partnerships, S corporations, C corporations, individuals, estates and trusts, and exempt organizations, are granted an extension of time to file a superseding 2024 Federal income tax return if their duplicate copy is filed before November 15, 2025. This offers welcome relief, especially for calendar-year and early fiscal-year taxpayers who are currently in the process of finalizing their 2024 tax filings related to R&E expenditures.

Businesses, especially those with both foreign and domestic research expenditures, are strongly advised to meticulously evaluate the new and existing procedures. The choice of election or method change can have far-reaching implications, potentially affecting other Code provisions such as the corporate alternative minimum tax. Careful financial modeling is essential to determine the most advantageous approach given a company’s specific tax profile and R&E activities.

In our experience, these continuous shifts in tax law, particularly concerning critical areas like research and experimental expenditures, create a significant administrative burden and introduce considerable uncertainty for small and mid-sized businesses. The back-and-forth on R&E expensing, from immediate deduction to mandatory amortization and now back to new options, highlights the need for a proactive and informed tax strategy. Many businesses, especially those without dedicated in-house tax expertise, find themselves struggling to keep pace with these complex regulations and their potential impact on cash flow and overall financial health. This is precisely where expert guidance in tax preparation and compliance becomes invaluable. We help clients navigate these intricate changes, ensuring they leverage available elections and method changes to optimize their tax position. Businesses seeking clarity and assistance with these new IRS procedures can contact C&S Finance Group LLC at csfinancegroup.com to get started.

The legislative landscape surrounding R&E expenditures may continue to evolve. The Senate Finance Committee’s proposed reconciliation tax bill, released in June, suggests further changes, potentially allowing immediate expensing of domestic SREs for tax years beginning after December 31, 2024, and offering an election to deduct unamortized amounts from the TCJA period. Businesses should monitor these legislative developments closely, as future congressional action could introduce additional modifications to the treatment of these critical investments.