IRS Updates Accounting Method Change Procedures for R&E Expenditures
Revenue Procedure 2026-32 provides updated procedures for accounting method changes under Sections 174 and 174A following the One, Big, Beautiful Bill Act.
The Internal Revenue Service (IRS) released Revenue Procedure 2026-32, providing updated procedures for taxpayers seeking automatic consent to change their methods of accounting for research or experimental (R&E) expenditures under Sections 174 and 174A.
The guidance primarily modifies previous procedures to incorporate changes necessitated by the One, Big, Beautiful Bill Act (OBBBA) and provides important clarification for taxpayers navigating the transition from the Tax Cuts and Jobs Act (TCJA) Section 174 rules to the new Section 174A framework.
Background: Section 174 and Section 174A
The Tax Cuts and Jobs Act amended Section 174 to require taxpayers to capitalize and amortize R&E expenditures over:
- Five years for domestic R&E expenditures
- Fifteen years for foreign R&E expenditures
These requirements applied to tax years beginning after December 31, 2021.
The OBBBA subsequently amended Section 174 so that it applies exclusively to foreign R&E expenditures and enacted Section 174A, which generally allows taxpayers to immediately deduct domestic R&E expenditures for tax years beginning after December 31, 2024.
These legislative changes created a need for updated accounting method change procedures, particularly for taxpayers transitioning between the TCJA rules and the new Section 174A treatment.
What Changed Under Revenue Procedure 2026-32?
Revenue Procedure 2026-32 modifies the existing automatic change procedures in Section 7 of Revenue Procedure 2025-23, as previously modified by Revenue Procedure 2025-28.
Section 481(a) Adjustments
For changes relating to domestic R&E expenditures under TCJA Section 174, the guidance clarifies that the Section 481(a) adjustment must reflect the taxpayer’s previously adopted “recovery of unamortized amount” method.
If a taxpayer makes both a change to its Section 174 treatment and a change to its recovery of unamortized amount method in the same year, the Section 481(a) adjustment period aligns with the amortization period elected, either one or two years.
Eligibility Rules
Revenue Procedure 2026-32 extends the waiver of the “prior five-year change” eligibility rules contained in Revenue Procedure 2015-13.
The waiver now applies to automatic changes for R&E expenditures under Sections 174 and 174A for any taxable year beginning before January 1, 2028.
This provides taxpayers with additional flexibility to make necessary accounting method changes even if they previously made changes involving the same item within the five-year eligibility period.
Foreign R&E Expenditures
The guidance also removes the limitation that previously restricted automatic changes for foreign R&E expenditures to tax years beginning before January 1, 2026.
As a result, taxpayers have additional time to implement accounting method changes related to foreign R&E expenditures.
Effective Date
Revenue Procedure 2026-32 is generally effective for any Form 3115, Application for Change in Accounting Method, filed after September 4, 2026.
What This Means for CPAs and Their Clients
Revenue Procedure 2026-32 provides important administrative guidance for taxpayers transitioning between the TCJA Section 174 capitalization requirements and the new R&E rules established by the OBBBA.
Key considerations include:
- Coordinating prior Section 174 expenditures with Section 174A. The guidance allows taxpayers to address TCJA Section 174 expenditures while adopting the new guidance under OBBBA Section 174A. It also provides timing guidance for applying adjustments related to TCJA-period expenditures in coordination with the “unamortized amount” deduction allowed under the OBBBA.
- Additional flexibility for foreign R&E expenditures. The removal of the previous limitation provides additional time for taxpayers seeking to implement changes related to foreign R&E expenditures.
- Broader relief from eligibility restrictions. The extended waiver of the prior five-year change rules gives taxpayers greater flexibility to make accounting method changes involving R&E expenditures.
- Section 174A timing remains important. The guidance does not change the timing for adopting Section 174A in tax year 2025 through an automatic change. However, it does address prior eligibility issues associated with making changes related to TCJA expenditures while adopting Section 174A. Future guidance will likely allow for an automatic change.
Recommended Next Steps
CPAs should consider reviewing clients with domestic or foreign R&E expenditures to determine whether Revenue Procedure 2026-32 affects accounting method changes being made or contemplated for the 2025 and 2026 tax years.
Particular attention should be given to:
- Clients that capitalized domestic R&E expenditures under the TCJA Section 174 rules
- Clients evaluating the treatment of remaining unamortized domestic R&E expenditures
- Clients adopting Section 174A for domestic R&E expenditures
- Clients with foreign R&E expenditures
- Taxpayers that previously made an accounting method change that could have created an eligibility issue under the prior five-year rule
Revenue Procedure 2026-32 provides necessary administrative updates to align accounting method change procedures with the legislative changes introduced by the OBBBA. Taxpayers should carefully review the applicable designated change numbers, Section 481(a) adjustments, and transition rules to determine the appropriate treatment for their facts and circumstances.
