Action Required: IRS Releases Guidance on Section 174 Domestic R&E Expenditures Ahead of Fall Deadlines

The IRS released Revenue Procedure 2025-28 on August 28, 2025, providing guidance on how eligible taxpayers could immediately deduct domestic research and experimental (R&E) expenditures in the 2024 taxable year. The availability for immediate expensing in the 2024 taxable year for designated calendar-year taxpayers must be completed by September 15 for pass-through entities and by October 15 for C corporations. Even with the impending deadline, analysis and application regarding the new IRS guidance should occur to maximize cash savings.

Under the One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, a small business taxpayer can elect to immediately deduct domestic R&E expenditures capitalized in the 2022, 2023 and 2024 taxable years through amendments or implement a change in method of accounting in 2024 to immediately deduct domestic R&E expenditures incurred in 2022 and 2023 that are capitalized as of January 1, 2024.

A small business taxpayer is any taxpayer, other than a tax shelter, that meets the IRC §448(c) small business gross receipts test for its first taxable year beginning after December 31, 2024. For example, a calendar-year taxpayer will be deemed a small business taxpayer if their average gross receipts for 2022, 2023 and 2024 do not exceed $31 million.

The IRS guidance clarified that if a federal income return has already been filed but has a valid extension, a superseded return can be filed to apply the recently released IRS guidance. Even if an extension was not filed, the IRS guidance provides that an automatic extension can be used solely for the purpose of immediately expensing domestic R&E expenditures through an amendment or a method of accounting change.

The Revenue Procedure clarified that small business taxpayers can file their 2024 federal income tax returns immediately, expensing domestic R&E expenditures incurred during the taxable year, provided they attach a required statement stating that the taxpayer will file an AAR or amended return for each applicable year, including taxable years December 31, 2022, and December 31, 2023. While the amended returns do not have to be filed by the 2024 fall filing deadline, it is required that the taxpayer acknowledge their agreement to amend previously filed returns for the applicable years by deducting the domestic R&E expenditures on a timely filed 2024 return. Therefore, a taxpayer cannot choose which taxable years they will immediately expense domestic R&E if amending.

In addition, the IRS guidance provides the opportunity for taxpayers who have an R&D credit in the amended years to make a late §280C(c)(2) election when filing their amended tax returns and reduce their R&D credits by 21% of the credit. Alternatively, §280(c)(1) would apply, and the amount of the 174 R&E deduction would need to be reduced by any R&D credit claimed.

Considerations: If an Administrative Adjustment Request (“AAR”) is required to be filed for a BBA partnership, the negative adjustment will be included in the partner’s taxable year when the AAR is filed. The negative adjustment will be passed on to partners, who will be treated as receiving a nonrefundable credit on their tax return for the year in which the adjustment is made. If a partner cannot utilize the entire credit, the benefit will be lost.

The IRS generally states that the refund timeline for an amended pass-through return could take 16 weeks or longer. With a potential government shutdown looming on September 30, taxpayers should take into consideration the timing of when a refund would be received.

Alternatively, a taxpayer can choose to make a change in method of accounting on their 2024 timely filed return. The recent guidance suggests that Form 3115 should not be filed; instead, a required statement should be attached to the return, including DCN 273. The §481(a) adjustment would include any remaining capitalized domestic R&E amounts incurred in the 2022 and 2023 taxable years as of January 1, 2024. If an IRC §280C(c)(2) election is not made, then the §481 adjustment would need to be reduced by any R&D credits claimed in the 2022 and 2023 taxable years. However, if a late IRC §280C(c)(2) election is desired, the 2022 and 2023 tax returns would still need to be amended.

The 2024 immediate expensing of R&E expenditures would be reflected on the current year tax return, outside of the 481 adjustment.

Considerations: By making a method of accounting adjustment in the 2024 taxable year, the ability to collect a refund should be quicker, with the IRS stating that refunds must be issued in less than 21 days. In addition, provided that an IRC §280C(c)(2) is not made, there is no requirement to amend the 2022 or 2023 tax return, allowing the administrative costs to be reduced.

No. Both amending and the method of accounting change are elections that can be made by small business taxpayers but are not required. A small business taxpayer can also choose to allow the amortization of the domestic R&E to continue over a five-year period or make a method of accounting change in the 2025 taxable year to deduct all domestic R&E incurred in 2022, 2023 and 2024 taxable years that remains capitalized as of January 1, 2025. In addition, if the taxpayer chooses, they can spread the method of accounting adjustment over a two-year period, equally impacting their 2025 and 2026 returns.

Modeling is needed when deciding the best way for a business entity to apply the recent IRS guidance related to 174 domestic R&E. A variety of factors will impact a business entity’s decision, including a C corporation’s consideration of IRC §382 limitations, and pass-through entity owners evaluating the excess business loss limitation rules under IRC §461(l). In addition, there may be a desire under IRC §174A(c) to elect to amortize domestic R&E over a 60-month period beginning with the month in which the taxpayer first realizes benefit, or to make an IRC §59(e) election to amortize domestic R&E over a 10-year period.

In this episode ofTaxing Topics, Withum’s Lynn Mucenski-Keck, Partner and Withum’s Federal Tax Policy Lead, breaks down the newly released IRS Revenue Procedure 2025-28 and its impact on domestic research and experimental (R&E) expenditures. Learn how small business taxpayers can leverage immediate deductions for 2024, avoid amendments and accelerate cash refunds.