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New Administrative Guidance Issued Governing the Tax Treatment of R&D Expenditures

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Written by: Peter J. Scalise

  

On August 28, the IRS released Revenue Procedure 2025-28, providing administrative guidance in connection to how eligible small businesses can apply the new I.R.C. § 174A full deductibility rules under the One Big Beautiful Bill Act (“OB3”) signed into law by President Trump on July 4th of 2025.

The important takeaway for taxpayers that are statutorily defined as a small business under the OB3 with average annual gross receipts of $ 31 million or less over the 2022, 2023, and 2024 tax years, can select the subsequent options to apply the changes to 2022, 2023, and 2024 tax returns as follows:

  • 1)  Amended tax returns for 2022 and 2023 are still required.
  • 2)  A 2024 amended return is not required. Instead, clients may deduct 2024 R&E expenditures on their originally filed return or file a superseded return by the extended due date.

As a Best Practice, taxpayers should attach a statement to their original, AAR or amended Federal tax return titled exactly: “FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28” and include all of the following information in the statement:

1) Name and TIN of the taxpayer.

  • 2) A declaration you are not a tax shelter for your first tax year beginning after December 31, 2024 (i.e., if you will make the related I.R.C. § 1.448-2(b)(2)(iii)(B) election).
  • 3) A declaration you meet the I.R.C. § 448(c) gross-receipts test for that first year after December 31, 2024 (i.e., average annual gross receipts for the prior-3-year period of 2022, 2023, and 2024 is less than $31 million).
  • 4) State which election you are making for domestic R&E in applicable years:
    •  - Deduct in the year paid / incurred, or
    •  - Capitalize and amortize under I.R.C. § 174A(c). If amortizing, state you’ll capitalize the costs and amortize over at least 60 months and list the number of months.
  • 5) A declaration you will file AARs/amended tax returns (as needed) to apply the election to any other applicable years already filed before 9/15/2025 (i.e., 2022-2023 and 2024 if you’ve filed).

The complete scope and application of Rev. Proc. 2025-28 can be referenced at https://www.irs.gov/pub/irs-drop/rp-25-28.pdf