IRS Guidance on Domestic R&D Expenses: What Businesses Need to Know

On August 28, 2025, the IRS issued Revenue Procedure 2025-28, which finally answers how businesses should treat domestic research and experimental (R&E) costs for 2024 and subsequent years following the enactment of the One Big Beautiful Bill Act (OBBBA) in July 2025.

The OBBBA reversed course for domestic R&E by creating new §174A, which allows for the immediate deduction of domestic R&E costs starting with tax years beginning after December 31, 2024.

Foreign R&E expenditures remain subject to capitalization and 15-year amortization under amended §174.

Key Provisions of Rev. Proc. 2025-28

Starting in 2025, domestic R&E expenses are deductible as incurred (under §174A). Taxpayers may instead elect to capitalize and amortize over 60 months.
Transition Relief for 2022–2024 costs: If the domestic R&E expenses were capitalized under TCJA rules, you can choose either:
Deduct the remaining unamortized balance in full in tax year 2025, or
Spread the deduction ratably over tax years 2025 and 2026.

Small Business Taxpayers – Special Rules

Small business taxpayers (≤$31M average gross receipts; not tax shelter) have the following options:
May elect to apply §174A retroactively to tax years 2022–2024.
The election applies consistently across all years and removes the ability to use the transition relief outlined above.
For 2024 returns still on extension (due October 15, 2025), the election may be made with the original filing by attaching the required statement.
If this election is made, the 2022 and 2023 tax returns must be amended.
The final deadline to make this retroactive election is July 6, 2026. Small businesses must also file their amended returns for 2022 and 2023 by that date.

Large Corporations

These taxpayers are not eligible for the small business retroactive election outlined above, but instead:
They must continue to follow TCJA capitalization rules for 2022–2024; and
Then, use the transition relief to deduct the remaining unamortized balance in the 2025 tax year or spread it evenly over the 2025–2026 tax year.

Additional Highlights

Interaction with the R&D credit: Domestic R&E deductions still need to be coordinated with the §280C rules. Rev. Proc. 2025-28 also allows small businesses to make or revoke late elections tied to the credit for earlier years.
Relief for early filers: Businesses that filed 2024 returns before September 15, 2025, have six extra months to file a superseding return to take advantage of these new elections.

What Businesses Should Do Now

Determine eligibility: Are you a small business under the $31M gross receipts test, or a larger taxpayer subject to transition relief only?
Model the options: For some, accelerating deductions in 2025 will be more beneficial; for others, the retroactive election could provide refunds for earlier years.
Review your 2024 return status: If you’re on extension through October, you can still make the election directly with your filing.
Prepare for amended filings: Small business taxpayers making the retroactive election must amend 2022 and 2023 returns by July 6, 2026.
Coordinate with credits: Make sure any decision aligns with your R&D credit strategy.

WG monitors IRS guidance and can assist in evaluating how these updates may affect your business operations and planning.