The IRS released new procedural guidance (Rev. Proc. 2026-32 (PDF - 213.72KB)), expanding automatic method change procedures for research and experimental (R&E) expenditures (see prior coverage). These changes follow legislative changes made to Section 174 as amended by 2025’s One Big Beautiful Bill Act (OBBBA) to Section 174A.
The recent guidance also provides automatic procedures for certain long-term residential construction contract changes under Sections 460 and 263A as enacted by the OBBBA.
These new procedures are generally effective for Forms 3115 filed after Sept. 4, 2026. However, taxpayers that properly file the duplicate copy of Form 3115 on or before Nov. 15, 2026, may use either the prior procedures or the modified procedures of Rev. Proc. 2026-32. While the new procedures are mostly taxpayer-favorable, eligible taxpayers should compare the differences between the procedures, including the timing of the Section 481(a) adjustments, before filing one of the affected method changes.
Expanded five-year eligibility waiver for R&E method changes
Rev. Proc. 2026-32 waives the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 to changes made for taxable years beginning before Jan. 1, 2028.
That five-year eligibility rule generally prevents a taxpayer from filing an accounting method change for the same item more than once within a five-taxable-year period. Prior guidance waived that rule only for specified changes made for a taxable year beginning in 2025.
The expanded waiver applies to most method changes involving domestic or foreign R&E expenditures. The procedures also permit certain taxpayers to change an impermissible method for domestic R&E expenditures under the prior Tax Cuts and Jobs Act (TCJA) Section 174 or foreign R&E expenditures even when the impermissible method was used only in the immediately preceding taxable year (i.e., to make a back-to-back change).
Grant Thornton Insight:
Taxpayers that previously concluded an R&E change required advance consent should reassess that conclusion before filing. The expanded waiver may permit use of the automatic procedures through taxable years beginning before Jan. 1, 2028, including in certain cases where an impermissible method was first used in the immediately preceding taxable year.
While Rev. Proc. 2026-32 extends the five-year eligibility waiver for Section 174A changes to taxable years beginning before Jan. 1, 2028, there is an inconsistency in procedures as it does not appear to expand the separate provision limiting the availability of the Section 174A automatic change to taxable years that begin in 2025. Taxpayers should not assume that the Section 174A automatic change is available for a later year unless the IRS clarifies or further modifies the guidance.
Revised computation of the modified Section 481(a) adjustment
Rev. Proc. 2026-32 coordinates the modified Section 481(a) adjustment for a change involving TCJA Section 174 domestic R&E expenditures with the OBBBA recovery of unamortized domestic R&E amounts. The procedures address two situations:
- Concurrent changes. When a taxpayer changes its TCJA Section 174 method and applies the recovery-of-unamortized-amount method in the same taxable year, the modified Section 481(a) adjustment must reflect the recovery approach selected for the unamortized domestic R&E amounts (either one-year or two-year spread accelerated deduction).
- Changes made in different years. When a taxpayer applied the recovery-of-unamortized-amount method for a taxable year beginning in 2025 and changes its TCJA Section 174 method in a later year, the later modified Section 481(a) adjustment must take the earlier recovery into account.
Grant Thornton Insight:
Taxpayers should model both procedural alternatives before filing. In some cases, the prior procedures may allow a positive modified Section 481(a) adjustment to be recognized over the standard four-year period while the related unamortized domestic R&E amount is deducted in the year of change (e.g., 2025).
The new procedures generally accelerate recognition of the positive adjustment to correspond with the taxpayer’s elected recovery period for unamortized domestic R&E. The difference in recovery periods may materially affect taxable income and cash taxes, making this modeling an important part of selecting a procedural approach.
State conformity and filing considerations
Although many states conform to federal accounting method change provisions, including Sections 446 and 481, taxpayers should independently analyze each state’s conformity to the underlying substantive federal provisions. State conformity to the federal treatment of domestic and foreign R&E expenditures varies significantly following enactment of the OBBBA.
In particular, some states have decoupled from the accelerated deduction, while others have decoupled from both the accelerated deduction and Section 174A. In jurisdictions that have decoupled from one or both provisions, the federal deduction may need to be modified for state income tax purposes.
While many states follow a federally approved or automatic accounting method change, some jurisdictions may require a separate state consent request or state-specific Form 3115. Others may require the federal Form 3115, IRS consent, an election or another notification to be included with the state return. Taxpayers should review state procedural requirements when considering the best course of action around R&E expenses.
Changes for long-term residential construction contracts
The OBBBA expanded the home construction contract exemption from the percentage-of-completion method to include residential construction contracts entered into in taxable years beginning after July 4, 2025.
The change applies to multifamily residential projects, including certain condominium and apartment buildings, that did not satisfy the prior limitation for buildings containing four or fewer dwelling units. Taxpayers that do not qualify for the small business exception must apply Section 263A to their affected residential construction contracts.
Rev. Proc. 2026-32 provides automatic procedures for taxpayers implementing these changes. An eligible taxpayer may change from the percentage-of-completion method (PCM) or the percentage-of-completion method/capitalized-cost method (PCCM) to a permissible-exempt-contract method. A taxpayer required to apply Section 263A may concurrently make an automatic change to begin capitalizing costs. Conversely, a qualifying small business taxpayer may concurrently make an automatic change to stop capitalizing costs under Section 263A.
Next steps
Make a quick (but well-informed) decision. Calendar-year partnerships and S corporations with Sept. 15, 2026, filing deadlines have very little time to evaluate and implement the new procedures. Calendar-year C corporations filing on Oct. 15, 2026, have approximately one additional month and may still need significant time to complete the required modeling, prepare Form 3115, and coordinate federal and state reporting.
In making this decision, taxpayers should prioritize the following actions:
- Model domestic TCJA Section 174 changes. Taxpayers making a domestic TCJA Section 174 method change should compare the taxable-income and cash-tax effects of the four-year Section 481(a) spread potentially available under the prior procedures with the potential one-year or two-year recovery period under the new procedures.
- Reassess changes previously expected to require nonautomatic consent. Taxpayers that planned to file a nonautomatic R&E method change should immediately determine whether the expanded eligibility waiver allows the change to be filed under the automatic procedures.
- Begin planning for 2026 residential construction contract changes. Taxpayers entering into residential construction contracts in taxable years beginning after July 4, 2025, should identify the contracts, determine the appropriate exempt contract and Section 263A methods, evaluate effects on other long-term contract methods, and begin preparing for any required method changes.
Contacts:
Partner, Washington National Tax Office
Grant Thornton Advisors LLC
Ellen Martin is the national leader of Grant Thornton’s Strategic Federal Tax Services business line and is located in the metro Washington DC area.
Washington DC, Washington DC
Washington, D.C.
Washington, D.C.
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