On August 28, 2025, the IRS released Revenue Procedure 2025-28, a significant piece of guidance that reshapes how businesses treat research and development (R&D) expenditures under the One Big Beautiful Bill Act (OBBBA). This development arrives just weeks before corporate returns are due on September 15 and October 15, 2025, which means businesses must quickly assess the potential impact. For many taxpayers, especially small businesses, these rules present both opportunities for current year tax savings and the chance to generate refunds for prior years.
The Shift in Treatment of Domestic R&D
Perhaps the most important change introduced by OBBBA and confirmed by Rev. Proc. 2025-28 is the creation of new Section 174A. For tax years beginning after December 31, 2024, domestic R&D expenditures may once again be deducted immediately. This marks a reversal of the Tax Cuts and Jobs Act of 2017 (TCJA) rule, which had required businesses to capitalize and amortize such costs over five years. The ability to deduct these expenses right away will allow companies to align their tax treatment more closely with their actual cash outlays, lowering taxable income in the year the R&D is performed.
At the same time, taxpayers are not forced into immediate expensing. Section 174A also permits an election to continue amortizing domestic R&D expenses over 60 months. This option may make sense in circumstances where a smoother pattern of deductions is preferable—for example, where spreading the deductions helps avoid creating or increasing a net operating loss.
The Continued Limitation on Foreign R&D
The treatment of foreign R&D remains much less favorable. Under the amended Section 174, businesses must continue to capitalize and amortize foreign research costs over fifteen years. This disparity creates a strong tax incentive to locate R&D activities in the United States rather than overseas, a policy objective that Congress has emphasized in recent years.
Transition Rules for Expenses from 2022–2024
A major question left open by the OBBBA was how to deal with R&D expenses that were already capitalized under the TCJA between 2022 and 2024. Revenue Procedure 2025-28 provides clarity. Taxpayers may elect either to deduct the entire remaining balance of unamortized domestic R&D costs in their first tax year beginning after December 31, 2024, or to spread that remaining balance evenly over two years starting in 2025. The availability of these transition options gives taxpayers some flexibility in matching deductions to their income profile and may create refund opportunities for those willing to file amended or superseding returns.
Interaction with the Research Credit
The guidance also revisits the interaction between R&D deductions and the research credit under Section 41. In particular, taxpayers may now make late elections under Section 280C(c)(2) to reduce the research credit instead of reducing R&D deductions. Conversely, taxpayers who previously made such elections may revoke them. This flexibility will allow companies to fine-tune the balance between deductions and credits to maximize overall tax benefits.
Accounting Method Relief
Normally, a change in the treatment of R&D expenditures would require filing Form 3115, Application for Change in Accounting Method. Recognizing the widespread and immediate effect of the OBBBA rules, the IRS is simplifying compliance. For the first tax year beginning after December 31, 2024, taxpayers may rely on a statement in lieu of Form 3115, which reduces the administrative burden and speeds up implementation.
Special Opportunities for Small Businesses
One of the most favorable aspects of Revenue Procedure 2025-28 is the special treatment it provides for small businesses. An “eligible small business” is defined as any taxpayer that is not a tax shelter and that meets the gross receipts test under Section 448(c). Specifically, the business must have average annual gross receipts of $31 million or less for the three prior tax years (2022 through 2024).
For these businesses, the benefits are substantial. They may apply Section 174A retroactively to the 2022–2024 period, effectively undoing the TCJA’s capitalization requirement for domestic R&D. In practical terms, this means a small business can file amended or superseding returns—or, in the case of partnerships, an Administrative Adjustment Request (AAR)—to immediately deduct expenses that had previously been capitalized. The result may be a cash refund for taxes already paid.
To make this election, small businesses must attach a specific statement referencing Revenue Procedure 2025-28 to the relevant return. Importantly, there are strict deadlines. Elections on amended returns or AARs must be filed no later than the earlier of July 6, 2026 or the applicable statute of limitations on refund claims.
The IRS also built in a “deemed election” rule for convenience. If a small business files its 2024 original or superseding return on or before November 15, 2025, and it deducts domestic R&D expenses on that return while meeting all other requirements, the election will be considered made automatically. However, businesses taking advantage of this deemed election in 2024 must also amend their 2022 and 2023 returns to apply the new rules consistently.
Extra Time to Act
Recognizing that many businesses had already filed 2024 returns before this guidance was issued, the IRS is granting an automatic six-month extension for filing superseding returns. This extension applies even if the taxpayer did not request an original extension, provided the superseding return is filed solely to implement OBBBA elections. To invoke this relief, taxpayers must clearly mark “REVENUE PROCEDURE 2025-28” at the top of the superseding return.
Because many of the most favorable provisions hinge on strict deadlines—November 15, 2025, for deemed elections and July 6, 2026, for retroactive amended returns—early action and careful planning are critical. For additional detail, please see Rev. Proc. 2025-28 26 CFR 601.204: Changes in accounting periods and in methods of accounting.