Article

Domestic research expenses and tax planning for fall 2025

Section 174 and other One Big Beautiful Bill Act amendment considerations

Sept. 24, 2025 · Authored by Kathleen Meade, Caitlin Slezak

On Aug. 28, 2025, the IRS issued guidance in Rev. Proc. 2025-28 (the procedures) for taxpayers to make certain elections and accounting method changes provided under section 70302 of the recently enacted tax and spending legislation known as the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).

Because the OBBBA amendments are generally effective for tax years beginning after Dec. 31, 2024, most taxpayers will not need to take action to implement the amendments until after the 2024 tax compliance season.

However, certain “small” taxpayers may implement the new law effective for tax years beginning after Dec. 31, 2021, and taxpayers with a short 2025 tax year may need to comply sooner. The following discussion addresses some time sensitive actions these taxpayers may wish to take in order to implement the favorable OBBBA domestic research expenses during the upcoming fall filing season.

For additional technical guidance and solutions from Baker Tilly tax professionals, subscribe to our biweekly Tax Trends newsletter for ongoing coverage of the significant changes introduced by the One Big Beautiful Bill.

Options for small taxpayers that haven’t yet filed 2024 income tax returns

In short, there are three options for the original 2024 return, including a superseding return. It is recommended that all options be modeled and reviewed in consultation with your tax advisor before proceeding.

1. Elect to retroactively apply OBBBA

a. Deduct 2024 domestic research and experimental (R&E) on an original return or on a superseding 2024 return (if eligible, as discussed below)

b. Attach the election statement

c. Do not continue to amortize 2022 and 2023 R&E on the 2024 return

d. This locks you into amending returns/ filing administrative adjustment requests (AAR) for 2023 and 2022

e. Must also retroactively apply section 280C as amended under the OBBBA (discussed below)

2. File a method change to retroactively apply OBBBA

a. Deduct 2024 domestic R&E on an original return or on a superseding 2024 return (if eligible, as discussed below).

b. Attach a statement in lieu of form 3115 to the original or superseding return, as applicable

c. Report a negative section 481(a) adjustment for the unamortized 2022 and 2023 domestic research expenses.

d. Amended returns/ AARs are also required if a taxpayer wants to make a late section 280C(c)(2) election or to elect to revoke a prior section 280C(c)(2) election, as further explained below. Otherwise, domestic research expenses are accounted for under section 280C, as amended under the OBBBA, consistent with the approach used on the originally filed return for the applicable year (reduce research credit or reduce research deductions, as appropriate).

3. Continue to capitalize and amortize domestic research expenses under the TCJA (no rush to implement changes now)

a. Assess and model the costs and benefits of the elections and method change alternatives post-busy season. See the article linked above for further details.

b. For retroactive changes, amended returns and AARs must be filed by the earlier of July 6, 2026, or the statute of limitations due date under section 6511.

In detail …

Retroactive application of section 174A

The procedures favorably permit small taxpayers that satisfy the gross receipts test and are not a tax shelter for 2025 to make elections and method changes for 2024 to implement the domestic research changes under the OBBBA retroactively for tax years beginning after Dec. 31, 2021. However, taxpayers will need to act quickly to analyze the options and incorporate these changes into 2024 returns that are due in only a few weeks. Key small taxpayer provisions applicable for 2024 are summarized below.

Taxpayers may consider filing a method change (new automatic change #273) or, alternatively, an election (OBBBA election) to apply the OBBBA domestic research provisions for tax years beginning after Dec. 31, 2021. Under section 174A of the OBBBA, domestic research costs may either be deducted or capitalized and amortized over no less than 60 months.

Manner of making the OBBBA election: The election is made by attaching a statement containing the seven items of information enumerated in section 3.03(2) of the procedures to the timely filed 2024 income tax return. The statement must be entitled “Filed Pursuant to section 3.03 of Rev. Proc. 2025-28.”

Method change procedures: Rev. Proc. 2025-28 provides guidance to make the small business retroactive method change by attaching a statement, in lieu of a form 3115, on or before the due date (including extensions) of the 2024 tax return (or superseding return, as appropriate) in accordance with the automatic change procedures in Rev. Proc. 2015-13 and, if applicable, the special procedure for superseding returns in section 8.05 of Rev. Proc. 2025-28.

This change is made with a modified section 481(a) adjustment that considers only unamortized domestic research expenses paid or incurred in tax years beginning after Dec. 31, 2021, and before the beginning of the tax year of change (e.g., prior to Jan. 1, 2024, for a calendar 2024 tax year).

• Deemed OBBBA election: A small taxpayer that deducts 2024 domestic research expenses on the 2024 return without filing the necessary election statement(s) or method change will generally be treated as making a “deemed election.” This would require the taxpayer to file amended returns or AARs as appropriate for 2022 and/or 2023 rather than making a method change, which may not be desirable from a tax planning or administrative standpoint.
• Note: The procedures do not permit a taxpayer to make an OBBBA election for one or more prior applicable years and file a method change for other previous applicable years. A taxpayer that chooses to implement the OBBBA retroactively either files a method change or makes OBBBA elections for all applicable years (2022 through 2024).

Section 280C changes

Amended return(s) or AAR(s) are required if a small taxpayer wishes to make an irrevocable late section 280C(c)(2) election to reduce the R&D credit or, alternatively, to revoke a prior year section 280C(c)(2) election for any prior applicable year (2022, 2023 and/or 2024). Unlike the OBBBA election, the taxpayer may choose which applicable year(s), if any, to make a late section 280C(c)(2) election or revoke a prior section 280C(c)(2) election. Unfortunately, the procedures do not permit these elections to be made via a method change, unlike procedures issued for other tax law changes, such as COVID-relief legislation.

• Both section 280C elections require that adjustments be made to the R&D credit and research expense amounts, and that required forms (e.g., 3800 and amended 6765) and a statement be attached to the amended return or AAR for the applicable year.
• Alternatively, a small taxpayer that does not choose to make either of the optional elections must presumably make the necessary section 280C adjustments in accordance with the methodology used on the originally filed return for the applicable year.

Amended return and AAR timing

Taxpayers will need to act timely to file amended return(s) or AAR(s) by the earlier of July 6, 2026 or the statute of limitations deadline under section 6511. Consequently, as illustrated by examples in the procedures, 2022 amended or AAR filings may be due prior to July, 6, 2026 under section 6511 depending on the taxpayer’s facts.

Eligible small taxpayers may file a superseding 2024 tax return to implement the OBBBA

Certain eligible organizations (which are defined below) are granted a six-month extension to file a superseding income tax return for a tax year that began in 2024 and ended prior to Sept. 15, 2025, solely for the purpose of making the small business OBBBA election or automatic method change, as well as making an optional late section 280C election or an election to revoke a prior year section 280C election.

Eligible entities include only a partnership, S corporation, C corporation, individual, trust, estate or exempt organization that:

• Did not file for an extension;
• Has a due date prior to Sept. 15, 2025 for the tax return (excluding extensions);
• Timely filed the tax return and K-1 forms (as applicable) prior to Sept.15, 2025; and
• Files a superseding return within 6 months of the original, unextended due date of the income tax return.

Transition rule for taxpayers that filed a 2025 income tax return prior to Sept. 15, 2025

A taxpayer that filed a federal income tax return on or before Sept.15, 2025 for a taxable year beginning after Dec. 31, 2024, is deemed to have complied with the procedures (i.e., no further action required), provided they –

a. Deducted domestic research costs paid or incurred in 2025 under section 174A(a) or, alternatively, capitalized and amortized these costs under section 174A(c) and reported the costs paid or incurred on Part IV of form 4562;

b. Amortized the unamortized domestic research costs paid or incurred during the 2022 - 2024 tax years either in full in the first tax year beginning after Dec. 31, 2024 (2025) or ratably over the two-year period beginning with the first tax year after Dec. 31, 2024 (2025-2026).

If you have questions on how this information may impact your specific tax situation, contact your Baker Tilly tax advisor today.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.