IRS Provides Much-Needed Guidance for R&D Relief Under the OBBBA

On August 28, 2025, the IRS issued Revenue Procedure 2025-2028, which provides procedures for making elections and changing accounting methods for domestic research and development (R&D) expenses under the One Big Beautiful Bill Act (OBBBA). This guidance is especially important for small businesses (meeting the average gross receipts test pursuant to §448(c)) and creates immediate planning opportunities for all taxpayers with R&D expenses.

What led to this updated development? The controversy under §174 of the Tax Cuts and Jobs Act (TCJA) previously required taxpayers to amortize R&D expenses for years beginning after December 31, 2021, and before January 1, 2025, over five years for domestic expenditures and 15 years for foreign ones. This shift from immediate expensing to amortization created compliance and cash flow difficulties for businesses, especially for small businesses and startups.

The OBBBA, signed on July 4, 2025, reversed the TCJA §174 rules for domestic R&D expenses, allowing immediate expensing for tax years beginning after December 31, 2024. However, there was some uncertainty on how small businesses could apply the rules, an issue that Rev. Proc. 2025-28 now resolves.

For domestic R&D expenses previously capitalized and partially amortized before January 1, 2025, OBBBA provided two options for taxpayers to deduct these expenses.

1. The first option is applicable to any taxpayer. Taxpayers may elect to deduct unamortized domestic R&D expenses in their 2025 tax year or to ratably deduct them over 2025 and 2026. Rev. Proc. 2025-28 requires filing a statement in lieu of Form 3115, informing the IRS of the election found in §7.02(5)(a)(ii).

2. The second option is applicable to small business taxpayers, who may elect to deduct domestic R&D expenses in the tax year in which the R&D expenses were paid and incurred. For the 2024 tax year, the election is made on a timely filed original return or a superseded return, while amended returns must be filed for the 2022 and 2023 tax years. The amended returns must be filed by the earlier of July 6, 2026, or the due date for filing a claim for refund, which is quickly approaching for the 2022 tax year.

This move by the IRS is seen as a response to industry concerns and the legislative intent of the OBBBA, with the intention of promoting domestic growth. Rev. Proc. 2025-28 provides much-needed clarity, relief and flexibility for businesses and may be one of the most influential tax developments of the year for certain taxpayers.

For assistance with the tax implications of your R&D expenses, please contact us.

Contributing author: John F. Martin, CPA/PFS, CFP^®, is a tax partner with over 38 years of experience providing tax compliance and consulting services to various clients, including multi-national corporations, closely held companies and individuals. For more information on this topic, you may contact John at jmartin@dmcpas.com or (315) 472-9127.