On August 28, 2025, the IRS issued an advance copy of Revenue Procedure 2025-28, providing important procedural guidance for taxpayers implementing the new rules under Section 174A introduced by the One Big Beautiful Bill Act (OBBBA). This article highlights the new guidance regarding the small business taxpayer retroactivity election, which may require prompt attention from eligible taxpayers. For assistance navigating these complex changes, local businesses can turn to a certified public accountant familiar with the latest IRS rulings.

Overview of OBBBA Changes

The OBBBA adds Section 174A to the Internal Revenue Code, allowing taxpayers to fully deduct domestic research and experimental (R&E) expenses in the year they are paid or incurred—known as the 174A deduction method. Alternatively, taxpayers may capitalize and amortize domestic R&E costs over a minimum of 60 months, beginning when the benefits of those expenditures are first realized—referred to as the 174A amortization method. Foreign research expenses remain governed by a 15-year amortization period under Section 174. Additionally, changes to Section 280C(c) require taxpayers to either reduce their Section 174A deduction by the amount of their research credit or elect to reduce the credit itself. The new law also allows eligible small business taxpayers to apply these methods retroactively for tax years beginning after December 31, 2021. For guidance, consulting with experienced accountants in Sarasota can help determine whether the retroactive election offers potential advantages.

Small Business Taxpayer Retroactivity Election

What Qualifies as a Small Business Taxpayer?

To make the retroactivity election, a taxpayer must qualify as a small business for its first taxable year beginning after December 31, 2024. A taxpayer qualifies if:

• The combined gross receipts of the taxpayer and its aggregated group (as defined under Section 448(c)) do not exceed $31 million for the 2025 taxable year, based on the average annual gross receipts for the preceding three years.
• The taxpayer is not considered a tax shelter under the “syndicate” rule, which applies to partnerships or S corporations allocating more than 35% of losses to limited partners or entrepreneurs.

Factors to Consider Before Making the Election

Before electing to apply Section 174A retroactively, small businesses should carefully evaluate:

• The administrative cost of amending prior returns.
• Possible “syndicate” rule implications.
• The impact of Section 280C(c) adjustments on the R&D credit.
• How the election may affect other provisions such as the FDDEI deduction, Section 163(j) interest limitation, and Section 382 rules for corporate reorganizations.

Working with a knowledgeable Sarasota CPA firm can help you model different tax scenarios and determine whether immediate or delayed adoption provides the best long-term results.

How to Retroactively Apply Section 174A

A small business that has not yet filed its 2024 federal income tax return may elect to retroactively apply the 174A deduction or amortization method in one of two ways:

• By making the retroactivity election on its 2024 return and amending prior returns, or
• By filing an accounting method change with its 2024 return.

Under Section 3.03(4) of Rev. Proc. 2025-28, a small business is considered to have made the retroactivity election if its 2024 return deducts domestic R&E costs and meets the procedural requirements for all applicable prior years. Amended returns must be filed for tax years beginning after December 31, 2021, and before January 1, 2025, if the taxpayer previously capitalized and amortized domestic R&E expenses. A CPA near me can guide businesses through this process to ensure compliance with deadlines and documentation requirements.

Steps for Making the Retroactivity Election

Taxpayers must attach a statement titled “FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28” to their return, containing all required information. Amended returns or Administrative Adjustment Requests (AARs) for prior years must be submitted by the earlier of:

• July 6, 2026 (one year after the OBBBA enactment date), or
• The expiration of the statute of limitations for the applicable tax year.

Partnerships subject to the Bipartisan Budget Act (BBA) rules should note that any benefit from increased R&E deductions applies only to the year in which the AAR is filed—unused deductions cannot be carried forward.

Making an Accounting Method Change

Instead of amending prior returns, a taxpayer may file an accounting method change with its 2024 return to adopt either Section 174A method. No Form 3115 is required; however, a statement in lieu of the form must accompany the return, including the information required under Section 7.02(5)(a)(ii) of Rev. Proc. 2025-28. The accounting method change includes a Section 481(a) adjustment, which allows taxpayers changing to the deduction method to immediately deduct any unamortized R&E costs at the start of the year of change. Your Sarasota accountant can help evaluate whether a method change or amended return offers a more beneficial outcome for your situation.

Limited Extension for 2024 Returns

For taxpayers that already filed their 2024 returns using the old TCJA Section 174 rules (and whose due date fell before September 15, 2025), Rev. Proc. 2025-28 grants an automatic six-month extension to file a superseding return to make a retroactive election or method change. Taxpayers that extended their 2024 return and already filed may also file a superseding return by the extended due date to elect the 174A deduction or amortization method. If the taxpayer wishes to use the same method for 2025, no additional accounting method change is required for that year.

Businesses That Do Not Elect Retroactively

A small business that chooses not to make a retroactivity election need not take action until filing its first return for the 2025 tax year. At that time, it must either:

• File an accounting method change to adopt the 174A deduction or amortization method, or
• Elect to use the 174A amortization method prospectively.

The change is applied on a cut-off basis, with no Section 481(a) adjustment required. Taxpayers may also accelerate unamortized R&E costs from prior years—either entirely in 2025 or ratably over 2025 and 2026—on the same statement as the accounting method change. Those who delay the decision until after filing their 2024 return still have until the earlier of July 6, 2026, or the expiration of the statute of limitations to make the election and amend prior returns.

Section 280C(c) Considerations

When applying Section 174A retroactively, small businesses must also comply with the revised Section 280C(c) rules. These require either reducing the R&E deduction by the amount of the research credit or electing under Section 280C(c)(2) to take a reduced credit. Revenue Procedure 2025-28 allows taxpayers to make a late Section 280C(c)(2) election for prior years, provided the original return was filed by September 15, 2025. Taxpayers using the accounting method change option should also consider how the Section 280C(c) adjustment affects their Section 481(a) calculation.

Additional Guidance in Revenue Procedure 2025-28

Beyond the retroactivity election, the new Revenue Procedure provides:

• Automatic accounting method changes for domestic R&E expenses paid or incurred after December 31, 2024.
• Procedures for electing to use the 174A amortization method instead of filing a method change.
• Guidance for deducting unamortized R&E amounts from TCJA years beginning after 2024.
• Continued automatic method changes for both domestic and foreign R&E expenditures, with foreign research costs still subject to 15-year amortization.

Key Takeaway

The procedural options outlined in Revenue Procedure 2025-28 give small businesses valuable flexibility when transitioning to the new R&E expense rules under the OBBBA. However, determining whether to amend prior returns or file a method change requires careful evaluation of each taxpayer’s unique situation.

Work With Experienced Sarasota CPAs

If you’re a small business owner looking for clarity on how the new R&E expense rules affect your filing strategy, the experienced team at Cavanaugh & Co can help. Our certified public accountants provide expert guidance on compliance, deductions, and long-term tax planning strategies tailored to your business. Whether you’re searching for a CPA near me, a trusted Sarasota accountant, or established Sarasota CPA firms with decades of experience, our professionals are here to help. Contact Cavanaugh & Co today to discuss your tax situation and ensure your business takes full advantage of available opportunities under the OBBBA.