The IRS has released Revenue Procedure 2025-28, offering transitional guidance on how businesses should handle research and experimental (R&E) expenses following changes introduced by the One Big Beautiful Bill Act (OBBBA). These updates restore the ability to immediately deduct domestic R&E costs under Section 174, starting in 2025.
Key Highlights for Businesses
1. Immediate Deduction Reinstated
Under the TCJA, businesses were required to amortize domestic R&E expenses over five years and foreign expenses over fifteen. The OBBBA reverses this for domestic costs, allowing immediate deductions for expenses incurred in tax years beginning after December 31, 2024.
2. Retroactive Relief for Small Businesses
Eligible small businesses, those with average annual gross receipts of $31 million or less over the prior three years, can apply the new rules retroactively to 2022 through 2024. This may allow amended returns and potential refunds for previously amortized expenses.
3. Accelerated Recovery of Unamortized Expenses
Businesses with remaining unamortized domestic R&E costs from 2022–2024 may elect to:
- Deduct the full remaining amount in 2025, or
- Amortize it evenly over 2025 and 2026.
4. Optional Capitalization
Immediate deduction is not mandatory. Taxpayers may elect to capitalize and amortize domestic R&E expenses over at least 60 months. This election must be made by the due date of the original return (including extensions) for the applicable tax year.
5. Interaction with the Research Credit
The OBBBA modifies how the Section 41 research credit interacts with R&E deductions. Taxpayers must reduce their deduction by the full amount of the credit claimed. Alternatively, they may elect to reduce the credit instead. Small businesses can make late elections or revoke prior elections for tax years filed before September 15, 2025.
6. Accounting Method Changes
The IRS provides automatic consent for accounting method changes related to R&E expenses. In many cases, taxpayers can file a statement in lieu of Form 3115, simplifying the process.
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