OB3 Act: Research Expense Guidance is Released
Planning opportunities are abound, especially for 2024 returns, regardless of whether they are already filed
The IRS released Rev. Proc. 2025-28 to provide guidance related to the One Big Beautiful Bill Act (OB3 Act) changes to the deductibility of research & experimental expenses under §174 and new §174A. Warning: this guidance is hard to digest.
New §174A applies to expenses paid or incurred in tax years beginning after December 31, 2024; however, transition rules provide many options (and planning opportunities). To demonstrate the possibilities and related procedural requirements, assume a calendar year partnership (that cannot elect out of the centralized partnership audit regime) had domestic research expenses of $100,000 in both tax years 2023 and 2024. The partnership meets the §448(c) gross receipts test for tax year 2025.
Option 1a: Continue §174 Amortization
The simplest option is to apply existing §174 to the 2024 expenses; if the partnership does this, it would capitalize $100,000 and amortize it as follows: 2024 - $10,000; 2025 - $20,000; 2026 - $20,000; 2027 - $20,000; 2028 - $20,000; 2029 - $10,000.
The 2023 expenses would continue to be amortized as follows: 2023 - $10,000; 2024 - $20,000; 2025 - $20,000; 2026 - $20,000; 2027 - $20,000; 2028 - $10,000.
In tax year 2025, new §174A applies; the partnership must change its accounting method pursuant to Rev. Proc. 2025-28, Sec. 7.02; a statement will be attached to the return instead of Form 3115, Application for Change in Accounting Method. The partnership can choose either the §174A(a) method [full expensing] or the §174A(c) method [amortization over a period of no less than 60 months]. See Rev. Proc. 2025-28, Sec. 7.02(5)(a)(ii) for statement requirements.
Under Rev. Proc. 2025-28, Sec. 7.02(5)(a)(i), this change is made on a cut-off basis; no §481(a) adjustment is made in tax year 2025 to deduct the unamortized amounts.
Option 1b: Accelerated §174 Amortization
This option continues to apply existing §174 to the 2024 expenses while taking advantage of an OB3 Act transition rule to accelerate the amortization deductions. If the partnership does this, it would capitalize $100,000 and amortize $10,000 on the 2024 tax return.
Going into tax year 2025, the partnership has $160,000 in unamortized expenses: $70,000 from tax year 2023 and $90,000 from tax year 2024.
Under the OB3 Act §70302(f)(2)(A), the partnership can elect the recovery of unamortized amount method and deduct the unamortized amounts either:
Entirely in tax year 2025 ($160,000), or
Ratably in tax years 2025 and 2026 ($80,000 in each year).
In tax year 2025, new §174A applies; the partnership must change its accounting method pursuant to Rev. Proc. 2025-28, Sec. 7.02; a statement will be attached to the return instead of Form 3115. The partnership can choose either the §174A(a) method [full expensing] or the §174A(c) method [amortization of a period of no less than 60 months]. The statement will also have information related to the election to use the recovery of unamortized amount method. See Rev. Proc. 2025-28, Sec. 7.02(5)(a)(ii) for statement requirements.
Under Rev. Proc. 2025-28, Sec. 7.02(5)(a)(i), this change is made on a cut-off basis; no §481(a) adjustment is made in tax year 2025 to deduct the unamortized amounts.
Option 2a: Full Deduction with Amended Returns
If a trade or business (other than a §448(a)(3) tax shelter) meets the §448(c) gross receipts test (learn more about it in this article) for the first tax year beginning after December 31, 2024, it can elect to apply new §174A for expenses paid or incurred after December 31, 2021. The partnership can choose either the §174A(a) method [full expensing] or the §174A(c) method [amortization of a period of no less than 60 months].
This small business retroactive method election must be made by July 6, 2026, and it is made by attaching a statement to its administrative adjustment request (AAR) or original or amended income tax return, as applicable, for an applicable tax year. Rev. Proc. 2025-28, Sec. 3.03(2) provides the election statement requirements. It is important to note that the refund statute of limitations for a particular tax year may require an earlier filing to preserve the right to receive a refund.
For purposes of an original income tax return timely filed on or before November 15, 2025, the taxpayer is deemed to have made this election if it deducts the domestic research expenses paid or incurred during the tax year on the original return and otherwise complies with the requirements of Rev. Proc. 2025-28, Sec. 3.03 for all other applicable tax years.
If the partnership makes the small business retroactive method election, it will:
File an AAR for tax year 2023 to deduct the $90,000 in previously capitalized research expenses, and
File an AAR, original return, or superseding return for tax year 2024 to deduct $100,000 in paid research expenses.
If the partnership has filed its 2024 tax return, Rev. Proc. 2025-28, Sec. 8.03 grants an automatic extension to allow a superseding return to be filed by the partnership because it is making the small business retroactive method election under Rev. Proc. 2025-28, Sec. 3.
This automatic extension ensures that businesses that filed their 2024 returns without an extension are not disadvantaged and have the same options as businesses that chose to file an extension and file their returns later in the year.
Option 2b: Full Deduction with No Amended Returns
Under Rev. Proc. 2025-28, Sec. 7.02(3)(c), the business can change its method of accounting on its 2024 original return if filed after August 28, 2025, to the small business retroactive method. To do this, it will file Form 3115 and make a negative §481(a) adjustment.
Changing the accounting method in tax year 2024 would allow the partnership to deduct $190,000 of research expenses, including the unamortized amounts from tax year 2023 and the entire 2024 expense amounts.
If the partnership has filed its 2024 tax return, Rev. Proc. 2025-28, Sec. 8.03 grants an automatic extension to allow a superseding return to be filed by the partnership because it is making an accounting method change under Rev. Proc. 2025-28, Sec. 7.02(3)(c).
Shout Out
Thank you to Brian Coddington, EA, for his review and feedback on this article!