DMJPS e-Blast August 29: Tax Alert

IRS Clarifies 2024 R&D Expensing

Rules for Businesses

The 2025 Tax Act, commonly known as the One Big Beautiful Bill (OBBB), reinstated expensing of research and experimentation or development (R&D) costs. For the last three years, all taxpayers have been required to capitalize domestic R&D costs and amortize them over five years. Under OBBB, the ability to expense these costs is generally effective for tax years beginning in 2025. However, “small taxpayers” are allowed to apply the change retroactively to 2022. Small taxpayers are defined as taxpayers that meet the § 448(c) gross receipts test for their first taxable year beginning after December 31, 2024. This means gross receipts for 2022, 2023, and 2024 must average $31 million or less.

You can READ MORE from the DMJPS summary of OBBB provisions HERE. 

On August 28, the IRS released Revenue Procedure 2025-28. In addition to addressing the OBBB changes made to R&D costs for all affected taxpayers, it spells out procedures for the small taxpayer relief. For many, the most pressing question requiring IRS guidance was for small taxpayers interested in taking advantage of the transition rule on their 2024 tax return, currently on extension.

The text of OBBB indicated that expensing these costs for years prior to 2025 could only be done via an amended tax return. Yet, it seemed unreasonable to require taxpayers who have not yet filed their 2024 return to capitalize costs and then amend that return to expense those same costs.

Key takeaways for clients over the 2022–2024 tax years, who are eligible and choose the option to apply the changes to 2022-2024 returns, include:

• Small taxpayer relief on 2024 returns – Revenue Procedure 2025-28 allows small taxpayers to expense R&D costs directly on their original 2024 return instead of filing and later amending, providing faster tax savings and greater efficiency.
• Mandatory retroactive application – Electing to expense R&D costs on the 2024 return requires taxpayers also to amend their 2022 and 2023 returns (or file an AAR for certain partnerships), which can be time-consuming and should be weighed against expected tax rates in 2025–2026.

Read the Full DMJPS Summary

New opportunities with R&D credits – The Revenue Procedure permits late Section 280(c)(2) elections, which could previously could only be made on original returns. With expensing reinstated, this election could now benefit many taxpayers.

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