The IRS has issued Revenue Procedure 2025-28, providing long-awaited guidance on how businesses must handle research and experimental (R&E) expenditures following the One Big Beautiful Bill Act (OBBBA). These rules affect how domestic research costs are deducted or amortized, and they include special provisions for small businesses.
What Changed Under OBBBA?
Previously, Section 174 required businesses to capitalize and amortize all research costs over five years (domestic) or 15 years (foreign) rather than deducting them immediately. OBBBA modifies these rules:
- Domestic research expenses (Section 174A): Businesses can now deduct these costs in the year incurred or elect to amortize them over at least 60 months.
- Foreign research expenses (Section 174): These must still be amortized over 15 years.
- Section 280C coordination: If you claim the R&D tax credit, deductions must still be reduced to prevent a “double benefit.”
Special Relief for Small Businesses
Revenue Procedure 2025-28 provides two ways for eligible small taxpayers (generally those with average annual gross receipts under $31 million) to retroactively deduct domestic research expenses paid or incurred in 2022, 2023, and 2024:
- Amended Returns or AARs (2022–2024): Attach an election statement to amended returns (or Administrative Adjustment Requests for partnerships).
- Deemed Election for 2024: If a small taxpayer deducts research expenses on a timely filed 2024 return (due by November 15, 2025 for those on extension), they are deemed to have made the election even without an attached statement.
Important: If research expenses were incurred in 2022 or 2023, small taxpayers who elect on their 2024 return must also amend those prior years’ returns to apply the election consistently.
- 2022 returns: Refund claims must meet the standard three-year statute of limitations.
- 2023 returns: Amended returns must be filed by July 6, 2026.
Options for All Taxpayers
Even if a business doesn’t qualify for small-taxpayer relief, OBBBA provides an alternative:
- Elect to deduct any remaining unamortized research costs from 2022, 2023, and 2024 either fully on the 2025 return or spread evenly across 2025 and 2026.
- This may be more efficient than filing amended returns, particularly given that IRS processing times for amended filings currently exceed nine months.
What Businesses Should Do Now
- Evaluate your eligibility as a small taxpayer under Section 448(c).
- Decide whether to amend prior returns or make the election prospectively on your 2025 return.
- Keep detailed R&D documentation to support both Section 41 credits and Section 174 deductions/amortization.
- Coordinate elections carefully to avoid missed deadlines and maximize tax savings.
At CSSI, we help businesses navigate complex tax rules to ensure compliance and capture every available benefit. These new R&D rules are intricate, but they also present opportunities, especially for businesses with significant research investments over the last several years.
