Section 174(A) Election Guidance Released: Big Opportunity, Limited Time

In a tremendous win for domestic innovation, the One, Big Beautiful Bill Act (OB3) repealed mandatory amortization of Sec. 174 expenses.  Taxpayers celebrated, while tax providers awaited guidance – how would this welcome change be implemented?

Answers arrived last week in the form of Rev. Proc. 2025-28.  The guidance explains how small businesses may retroactively deduct past amortization and establishes accounting method changes for all taxpayers moving forward.

Before we dive in, it’s critical to recognize that the opportunities offered by Rev. Proc. 2025-28 are time limited.  There is a short window in which change may be effected, and conversations need to happen now.

Retroactive Application for Qualifying Small Businesses  

The OB3 established a new Section 174(A), which permits the immediate deduction of research expenditures for TY 2025 and beyond.

The new legislation also established a special retroactive opportunity for small firms with average gross receipts <$31M.  These firms can retroactively amend returns for TY 2022, TY 2023, and TY 2024, and recover the Sec. 174 expenses that had been amortized in those years.

Rev. Proc. 2025-28 tells us how to make this happen – and the procedure depends on the situation.

• Haven’t filed for TY 2024 yet? This is as easy as it gets – just deduct R&D expenses on the return, and the IRS will deem it as if the Sec. 174A election had been made. To take advantage of this “deemed election” the return must be filed by 11/15/2025.

• • But I already filed for TY 2022 and TY 2023 – what about them? If these returns capitalized R&D expenses, they do need to be formally amended, with an election statement added.  These amended returns must be filed by 7/6/2026 (also subject to §6511 refund statute) – otherwise the Sec. 174 expenditures won’t be retroactively deducted.
• Already filed for TY 2024? Not to worry.  The IRS realizes that lots of taxpayers already have, and the Rev. Proc. grants an automatic 6-month extension in which taxpayers can file a superseding return taking the Sec. 174A election.  The superseding return must be labeled “REVENUE PROCEDURE 2025-28,” and will override the original.  No amendment or AAR is required, which will minimize the compliance burden significantly.  Superseded returns are only allowed if the non-extended filing date (and year-end) for TY 2024 is prior to 9/15/2025.

Transition Rules for TY 2022-2024 Unamortized Balances

The OB3 also established an alternative for taxpayers of all sizes.  Taxpayers have the option to look forward, and deduct all remaining unamortized costs from TY 2022-2024 over 1 year (TY 2025), or split over 2 years (TY 2025 and TY 2026).  This amortization recovery election must be made on the taxpayer’s TY 2025 return.

Retroactive Elections are Available for a Limited Time Only

Thoughtful CPAs will be reviewing TY 2022-2024 filings for R&D clients to look for opportunities.  Early action is crucial, since the time window is limited.  This welcome development allows CPAs to proactively bring their clients unexpected benefit, strengthening relationships and perhaps sparking new ones.

We’re here to help.