IRS issues procedural guidance for domestic R&E under OBBBA

Retroactive application of Section 174A for small business taxpayers

Under the OBBBA, taxpayers with average annual gross receipts of $31 million or less (the Section 448(c) gross receipts test) computed for the first taxable year beginning after Dec. 31, 2024, may elect to retroactively apply Section 174A to domestic R&E paid or incurred in taxable years beginning after Dec. 31, 2021, rather than Dec. 31, 2024. Small business taxpayers that retroactively apply Section 174A may elect to deduct domestic R&E under Section 174A(a) or capitalize and amortize domestic R&E under Section 174A(c). Rev. Proc. 2025-28 provides clarifications on the two small-business only paths to retroactively apply Section 174A:

• Small business OBBBA election: The small business OBBBA election may be made on a timely filed (including extension) or amended federal tax return, or on an administrative adjustment request (AAR) in the case of a partnership subject to the Bipartisan Budget Act of 2015 (BBA) by attaching a statement to the AAR or federal tax return for each taxable year the election is effective. The procedures specify the information that must be included on the statement. The AAR or amended returns must be filed on or before the earlier of July 6, 2026, or the due date for filing a claim for credit or refund under Section 6511 or Section 301.6511(a)-1(a)(1) (the date that is three years from the time the return was filed).
  
  Small business taxpayers that timely file an original federal tax return on or before Nov. 15, 2025, and deduct domestic R&E paid or incurred during that taxable year on that return will be deemed to have made a small business OBBBA election on that return, provided all other procedural requirements for making a small business OBBBA election are satisfied.
  
  Once a small business taxpayer makes an election to retroactively apply Section 174A, the election must be carried out for all taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025, in which the taxpayer paid or incurred domestic R&E. Accordingly, a taxpayer that makes the election on a timely-filed 2024 return is required to amend 2022 and 2023, as applicable, to make the election on those returns.

• Change in method of accounting: Section 7.02(3)(c) of Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28, provides that a small business taxpayer may file a change in method of accounting for a taxable year beginning before Jan. 1, 2025, to retroactively apply Section 174A for domestic R&E paid or incurred in taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025.

Under the OBBBA, small business taxpayers that elect to retroactively apply Section 174A ꟷ using either of the permitted mechanisms described above ꟷ are also required to retroactively apply the conforming amendments to Section 280C(c), which require taxpayers claiming the gross research credit to reduce their domestic R&E by the amount of the gross research credit (OBBBA Section 280C(c)). Small business taxpayers that retroactively apply Section 174A may, for any taxable year in which it retroactively applies Section 174A and filed an original federal tax return on or before Sept. 15, 2025, make or revoke a Section 280C(c)(2) election. The procedures require a statement with specific information, beyond filing of an amended Form 6765, Credit for Increasing Research Activities.

The due date for making or revoking a Section 280C(c)(2) election is the earlier of July 6, 2026, or the due date of filing a claim for credit or refund, consistent with the due date for making a small business OBBBA election. Small business taxpayers cannot make or revoke a Section 280C(c)(2) election by filing a change in method of accounting, even if the taxpayer retroactively applies Section 174A by filing a change in method of accounting.

Automatic extension relief for certain small business taxpayers

Rev. Proc. 2025-28 also provides relief for certain small business taxpayers that timely-filed a tax return for the tax year beginning in 2024 and ending prior to Sept. 15, 2025, and for which the due date (excluding extension) is before Sept. 15, 2025. The procedures provide an automatic extension of time to file a superseding return solely for purposes of implementing the small business taxpayer-specific provisions.

Recovery of unamortized TCJA Section 174 domestic R&E

Rev. Proc. 2025-28 clarifies that the election to deduct the unamortized TCJA Section 174 domestic R&E amounts provided in OBBBA is a change in the amortization period of such amounts (either entirely in 2025, or ratably in 2025 and 2026). The procedures generally allow the catch-up deduction as a method change filed on a statement in lieu of Form 3115 (concurrently with a change from TCJA Section 174 to Section 174A).

Modifications to automatic method change procedures

Rev. Proc. 2025-28 made several modifications to the list of automatic method changes in Rev. Proc. 2025-23, including:

• Section 7.01 (DCN 265): The procedures are consistent with the unmodified version of the procedures but have been modified to apply only to TCJA Section 174 domestic R&E.
• Section 7.02 (DCN 273): New procedures for domestic R&E to comply with Section 174A and to recover the remaining unamortized TCJA Section 174 domestic R&E, including the method change for small taxpayers.
• Section 7.03 (DCN 274): The procedures are consistent with the unmodified version of the procedures in Section 7.01 of Rev. Proc. 2025-23 but apply only to foreign R&E under either TCJA or OBBBA.

Next steps

Rev. Proc. 2025-28 provides helpful procedural guidance for implementing the changes to R&D under OBBBA, including several key rules that apply to both 2024 and 2025 tax years. While many of the procedures are not relevant until 2025, certain small business taxpayer-specific procedures are applicable to 2024 tax years.

As the Sept. 15, 2025, filing deadline for 2024 tax years approaches, small business taxpayers that are partnerships and S corporation face limited time to evaluate which provisions to adopt and how to properly implement them. Small business taxpayers should begin assessing the impact of the guidance on their tax planning strategy immediately. For non-small business taxpayers, the procedural guidance in Rev. Proc. 2025-28 provides clarity ꟷ including certainty regarding the recovery of the remaining unamortized TCJA Section 174 domestic R&E as amortization ꟷ that is critical to modeling the impacts of OBBBA.