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IRS Provides Guidance on the New Rules for the Treatment of R&E Expenditures

IRS Provides Guidance on the New Rules for the Treatment of R&E Expenditures

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On August 28, 2025, the IRS released Rev. Proc. 2025-28, which provides anticipated guidance for taxpayers on how to comply with the new requirements for research or experimental (R&E) expenditures under Internal Revenue Code (IRC) Sections 174, 174A and 280C, as amended and added by the One Big Beautiful Bill Act (OBBBA). The revenue procedure addresses elections, amended and superseding returns and changes in accounting method for R&E expenditures, and provides transitional rules and extensions of time for certain filings. 

Of specific importance is that the revenue procedure provides the mechanics for taxpayers which are qualifying small businesses (QSBs) to immediately expense domestic R&E in taxable years beginning after December 31, 2021, and before January 1, 2025 (generally 2022–2024). What this means is that if you qualify as a small business, you may be eligible to deduct your 2024 R&E costs on your 2024 original return if you follow the proper procedures.

Key Provisions

  • QSBs: Qualified small businesses have significant flexibility to retroactively apply the new rules, potentially resulting in refunds for prior years, and allowing for immediate expensing on their current 2024 tax returns. Keep in mind that if you qualify as a QSB, the election must be made by the earlier of July 6, 2026, or when the statute of limitations for refund claims expires.
  • Amended and Superseding Returns: Rev. Proc 2025-28 grants an automatic 6-month extension of time to file superseding returns for taxpayers that have already filed their 2024 tax returns, and in addition provides specific instructions on how to file amended or superseding returns to make the necessary elections or changes in accounting method for R&E expenditures.
  • Accounting Method Changes: The procedure provides streamlined, automatic consent for required method changes, reducing administrative burden and uncertainty.  Elections and method changes are made via statements attached to original, amended or superseding returns, or via an Administrative Adjustment Request (AAR) for partnerships subject to the BBA audit regime.
  • Coordination with Research Credit – Section 280C: Rev. Proc. 2025-28 clarifies the interaction between deductions for R&E and the research credit, including the ability to make reduced credit elections for prior years.
  • Continued Amortization for Foreign R&E: Taxpayers with foreign R&E must continue to amortize these costs over 15 years, requiring careful tracking and separate accounting.

Other Key Points

  • Late and Revoked Elections: Small businesses may make late elections or revoke prior elections under § 280C(c)(2) adjusting research credit calculations, also due by July 6, 2026.
  • Effective Dates: Most provisions are effective August 28, 2025; automatic consent procedures apply for Form 3115 filed after that date.
  • Practical Impact: The procedure enables alignment of prior tax treatment with new OBBBA rules, provides relief deadlines and clarifies procedural filing and consent requirements for taxpayers and small businesses.

Conclusion

The rules are complex, but Rev. Proc. 2025-28 is a welcomed resource for taxpayers and practitioners navigating the new landscape for R&E expenditures under OBBBA. Among other items, the guidance provides detailed procedures for making elections, changing accounting methods and obtaining transition relief.  This will enable taxpayers to ensure compliance with the new rules and maximize available benefits for both current and prior years.

We are poised and ready to help you decipher this new guidance and what it means to your company. Contact us to learn more.

Contributors

Tommy Zavieh, C&I National Practice Leader, Partner, Frazier & Deeter Advisory, LLC

Sheila Anderson, Tax Partner, Frazier & Deeter Advisory, LLC

Allen Tobin, Tax Principal, Frazier & Deeter Advisory, LLC

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