The IRS has released transitional guidance (Revenue Procedure 2025-28) on how businesses can apply the One Big Beautiful Bill Act (OBBBA) changes to Section 174 research and experimentation (R&E) expenses. The guidance provides new options for both small and large businesses — and some important deadlines to be aware of.
Retroactive Deductions for Small Businesses
Eligible small businesses now have the option to apply the OBBBA rules retroactively, treating them as effective for tax years beginning after 2021 rather than after 2024.
How this works depends on whether a 2024 return was already filed before August 28, 2025:
- Filed before August 28, 2025
- Supersede the return under an automatic extension (filed by the extended deadline, typically September 15 or October 15), or
- File an amended 2024 return.
- Not filed by August 28, 2025
- File by the extended deadline and either:
- Elect to expense eligible R&E expenses, which would also require amended returns for 2022 and 2023, or
- Make an automatic method of accounting change and a “true-up” adjustment on the 2024 return for 2022 and 2023 R&E expenses.
- File by the extended deadline and either:
Key deadline: Elections must be made by the earlier of July 6, 2026 or the deadline for filing a refund claim (generally three years from filing the return).
Why it matters: These elections could lower taxable income for prior years and provide valuable cash flow relief.
Accelerated Deductions for All Businesses
Businesses with unamortized domestic R&E expenses from the Tax Cuts and Jobs Act (TCJA) can now:
- Fully recover those expenses on their 2025 return, or
- Spread the recovery across 2025 and 2026.
The IRS has clarified that these deductions will be treated as amortization expenses. This matters because, starting in 2025, the business interest deduction is tied to adjusted taxable income (ATI), which is calculated without deductions for depreciation, amortization, or depletion. In other words, treating R&E as amortization could increase ATI — and allow a larger business interest deduction.
Why it matters: This option provides a “clean slate” for R&E tracking going forward and could enhance interest deductibility.
Interaction with the Research Credit
Taxpayers cannot claim both a deduction and a credit for the same expenses. While deductions reduce taxable income, credits directly reduce tax liability — often yielding more savings.
The OBBBA has simplified this calculation:
- The amount capitalized is now reduced by the full amount of the research credit claimed.
- Example: If a $20,000 research credit is claimed, the capitalized amount for the year is reduced by $20,000.
Small businesses may also make late elections to reduce their research credit or revoke prior elections. These late elections apply to tax years for which the original return was filed before September 15, 2025, and must be made by July 6, 2026 or the refund claim deadline.
Why it matters: Businesses relying on the research credit should evaluate whether a deduction, reduced credit, or late election provides the greater long-term benefit.
Reduced Uncertainty
Revenue Procedure 2025-28 also provides automatic IRS consent for accounting method changes related to R&E expenses under the TCJA, OBBBA, the new small business retroactive options, and the recovery of unamortized expenses.
Why it matters: This simplifies compliance, reduces risk, and helps businesses move forward with confidence.
Next Steps
These new rules create valuable opportunities but also add complexity. Between the retroactive options, accelerated deductions, credit interactions, and looming deadlines, planning ahead is essential.
