The American Institute of CPAs is requesting that the Treasury Department and the IRS issue guidance—through modifications to Revenue Procedure 2025-28 and/or other published guidance—regarding the capitalization and amortization of domestic research and experimentation under Section 174A(c) of the tax code.
Issued last August, Rev. Proc. 2025-28 provides administrative guidance on the changes to the treatment of R&E expenditures under new Internal Revenue Code Section 174A, which was introduced by the One Big Beautiful Bill Act.
According to an analysis by top 20 accounting firm Cherry Bekaert, the new Section 174A benefits taxpayers who are engaged in research activities in the U.S. and reinstates a current deduction for qualifying domestic R&E expenditures incurred in tax years beginning after Dec. 31, 2024.
Rev. Proc. 2025-28 clarifies the statutory elections and accounting method changes applicable to domestic R&E expenditures. This guidance moves taxpayers from capitalization and amortization as required by Section 174 under the Tax Cuts and Jobs Act to currently deducting or an optional capitalization and amortization under new Section 174A.
The OBBBA didn’t change the rules for capitalizing and amortizing foreign R&E expenditures. These expenditures continue to be capitalized under Section 174 and amortized over 15 years.
In a Feb. 19 letter to the Treasury Department and the IRS, the AICPA says there’s conflicting language in Section 6 of Rev. Proc. 2025-28 that has led to varying interpretations of the election under Section 174A(c) as either a method of accounting or a taxable year election.
The letter, written by Cheri Freeh, chair of the AICPA Tax Executive Committee, states:
Section 6 of Rev. Proc. 2025-28 provides, in relevant part:
For domestic research or experimental expenditures paid or incurred in a taxable year beginning after December 31, 2024, a trade or business of a taxpayer (applicant) may elect to capitalize and amortize all such expenditures paid or incurred in the taxable year under section 174A(c)… The section 174A(c) method so elected, and the amortization period selected by the applicant under section 174A(c)(1)(B), must be adhered to in computing taxable income for the taxable year in which the election is made and for all subsequent taxable years unless the applicant obtains the consent of the Commissioner to change to a different method of accounting, or to a different amortization period.
The first sentence indicates that the election only applies to the expenditures incurred in the taxable year, seemingly in reference to the taxable year of the election thus making this a yearly election. However, the sentence stating the method so elected “must be adhered to in computing taxable income for the taxable year in which the election is made and for all subsequent taxable years” indicates this is a method of accounting that applies to all domestic R&E incurred in the year of the election and all subsequent years. However, another interpretation is that the adherence requirement might only apply to those costs incurred in the taxable year subject to the election.
For example, if a taxpayer elects under section 174A(c) to capitalize and amortize domestic R&E incurred in 2026 over a 72-month period, the adherence requirement merely requires the taxpayer in subsequent taxable years to continue amortizing the domestic R&E incurred in 2026 over its remaining 72-month period, but the taxpayer may choose whether to elect under section 174A(c) to capitalize domestic R&E incurred in each subsequent taxable year. Section 6 of Rev. Proc. 2025-28 notably did not provide any indication that the election can be made on a project-by-project basis, as was previously allowed under section 174 and Treas. Reg. § 1.174-4 prior to amendment by the TCJA.
The AICPA recommends the IRS:
- Issue guidance through modifications to Rev. Proc. 2025-28 and/or other published guidance, specifying that the capitalization and amortization election under Section 174A(c) is an election applied on a project-by-project basis for domestic R&E paid or incurred in the taxable year of election and subsequent taxable years consistent with Section 174 and Treas. Reg. §1.174-4 prior to amendment by the TCJA.
- Give taxpayers the option to treat the election under Section 174A(c) as a yearly election applied to domestic R&E paid or incurred in the taxable year of election only.
- Issue guidance, perhaps as a safe harbor, providing a simplified methodology of determining the month in which the taxpayer first realizes benefits from the domestic R&E based on the assumption that the month in which the taxpayer first realizes benefits is the mid-point of the taxable year in which such expenditures are paid or incurred.
- Issue guidance providing that an election to capitalize and amortize domestic R&E under Section 174A(c) is a method of accounting with respect to the specified domestic R&E paid or incurred during the taxable year of election subject to the election, consistent with Section 174 and Treas. Reg. §1.174-4 prior to the amendment by the TCJA.
“The AICPA strongly believes that allowing taxpayers to either make the election under Section 174A(c) on a project-by-project basis or on a taxable-year basis will appropriately balance flexibility with administrability. Tax practitioners also need clarification on the guidance as they prepare their tax returns,” Reema Patel, senior manager for tax policy and advocacy for the AICPA, said in a statement.
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