New IRS Guidance for R&E Deductions Changes Section 174 and Form 3115 Rules

The restoration of the federal current deduction for domestic research and experimental expenditures (R&E) addressed a major tax issue for technology, life sciences and other research-intensive companies. It did not eliminate the accounting-method work required to implement the new rules.

On September 4, 2026, the IRS issued Revenue Procedure 2026-32, which modifies the automatic accounting method change procedures for research expenditures under Sections 174 and 174A. The modified procedures generally apply to filings made after that date with transition rules for filings already in progress.

Companies that already evaluated the substantive R&E rules should now review whether the implementation reflected on their returns, workpapers and accounting-method change filings still follows the current procedures.

The deduction decision and accounting-method change are separate issues

The One, Big, Beautiful Bill Act (OBBBA) added Section 174A, which generally allows domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024 to be deducted currently. A taxpayer may instead elect under Section 174A(c) to capitalize those costs and amortize them over at least 60 months. Foreign R&E remains subject to capitalization and 15-year amortization under Section 174.

We previously discussed those substantive choices in Section 174 Capitalization Relief Is Here: How the OBBA Affects R&E Tax Strategy and R&E Deductions Under the OBBBA: Federal Relief, IRS Guidance, and State-Level Challenges.

Revenue Procedure 2026-32 addresses the next layer: how a taxpayer obtains consent to change the accounting method used to implement those rules. That question can arise when a company:

changes from capitalization to current deduction,
corrects its treatment of 2022 – 2024 domestic costs under the TCJA version of Section 174,
adopts a transition method for previously capitalized costs, or
changes its method of accounting for foreign R&E expenditures.

Not every R&E method change uses the same filing process

“Form 3115 requirement” is useful shorthand, but the actual procedure depends on the change.

Statement in lieu of Form 3115. Under Revenue Procedure 2025-28, the Form 3115 requirement is waived for changes under section 7.02 of Revenue Procedure 2025-23, and a statement is filed instead. Those changes are:

a change to the Section 174A(a) deduction method,
a change to the Section 174A(c) amortization method,
for small business taxpayers, a change to the small business retroactive method, and
a change to the recovery of unamortized amount method for remaining 2022–2024 capitalized costs.

The statement is treated as a Form 3115 for purposes of the automatic-change procedures, and the duplicate copy is not required. It must include the taxpayer’s name and identification number, the designated change number (273), a cut-off declaration where applicable, and declarations specific to the method being adopted, including the amortization period for a Section 174A(c) change and the recovery option for the unamortized amount method. A taxpayer making the recovery change in the same year as a Section 174A change may use one statement or separate statements. Where the year of change is later than the first tax year beginning after December 31, 2024, the modified Section 481(a) adjustment rules apply, and the statement must include the corresponding declaration and amount.

Form 3115. Two categories still require an actual Form 3115 with a supporting attachment:

corrections of pre-2025 domestic R&E under the TCJA version of Section 174 (section 7.01), and
changes involving foreign R&E (section 7.03).

Separate election statements. The Section 174A(c) capitalization election and the small business retroactive election are elections rather than method changes and use their own statements. A taxpayer that changes to the Section 174A(c) amortization method under section 7.02(3)(b) for a 2025 taxable year is also treated as having made the Section 174A(c) election.

Deemed compliance. A taxpayer that filed its 2025 return on or before September 15, 2025 is generally deemed to have complied if it properly deducted or capitalized its domestic R&E as applicable, or amortized the unamortized amount under the recovery method. No separate filing is required in that case.

Timing limits. By their terms, the changes to the Section 174A(a) and (c) methods under section 7.02(3)(a) and (b) apply to a taxable year beginning after December 31, 2024 and before January 1, 2026. Revenue Procedure 2026-32 does not modify that limit. Accordingly, taxpayers seeking to change to the Section 174(a) deduction method or Section 174A(c) amortization method for a taxable year beginning on or after January 1, 2026 should not assume that section 7.02(3)(a) or (b) provides an automatic method-change procedure for that year.

Section 481(a) now coordinates certain TCJA-era domestic R&E corrections with previously capitalized costs

A Section 481(a) adjustment generally prevents income or deductions from being duplicated or omitted when a taxpayer changes accounting methods. That calculation becomes more complicated when the same taxpayer is also recovering domestic R&E costs capitalized during 2022 through 2024.

Revenue Procedure 2026-32 addresses this for taxpayers correcting their TCJA-era treatment of domestic R&E under Section 17. If the taxpayer previously changed to the recovery of unamortized amounts method, the Section 481(a) adjustment must reflect that method. Any net positive adjustment is then taken into account as follows:

Concurrent change: If the taxpayer makes the correction and the recovery election for its first tax year beginning after December 31, 2024, the adjustment follows the elected recovery period: in full in that year, or ratably over two tax years.

Earlier recovery election: If the recovery election was made for an earlier year, the adjustment is taken into account over the amortization period remaining under that election.

A net negative adjustment may instead be implemented on a cut-off basis. This coordination deserves careful review where a company corrected historical Section 174 treatment while also accelerating its remaining domestic R&E basis.

Foreign R&E receives broader automatic-change relief

Foreign research remains on a very different tax schedule from domestic research. Section 174 continues to require foreign R&E expenditures to be capitalized and amortized over 15 years. “Foreign” research means research conducted outside the United States within the meaning of Section 41(d)(4)(F). The relevant location is where the research is performed, not where the taxpayer or the entity incurring the cost is located.

This can affect technology companies using offshore engineering teams, life sciences companies conducting research outside the United States, and multinational groups with development functions spread across entities.

Prior guidance limited the automatic method change for certain foreign R&E expenditures to tax years beginning before January 1, 2026. Revenue Procedure 2026-32 removes that cutoff. Taxpayers addressing a foreign R&E accounting-method issue for a taxable year beginning after 2025 may therefore still be able to use the automatic procedures, assuming the other eligibility requirements are satisfied.

Eligibility relief now runs through 2027

Revenue Procedure 2026-32 extends the waiver of two eligibility restrictions under Revenue Procedure 2015-13 for covered R&E method changes (sections 7.01, 7.02(3) and 7.03) for taxable years beginning before January 1, 2028. The two restrictions are:

the restriction applicable in the final year of a trade or business under section 5.01(1)(d), and
the five-year item-change restriction under section 5.01(1)(f).

Separately, for the domestic TCJA correction and the foreign R&E change, a taxpayer may change from an impermissible method it used for only one taxable year (the year before the year of change).

Together, these provisions give companies more room to correct or implement R&E methods without automatically falling outside the automatic-change procedures because of prior method activity.

Effective date and transition rules

The modified procedures apply to a Form 3115 filed after September 4, 2026. The revenue procedure also includes two transition rules:

Duplicate copies filed by November 15, 2026 under the prior procedures. If a taxpayer properly files the duplicate copy of its Form 3115 by that date and has not yet filed its original return for the year of change, it may implement the change under either the prior version or the modified version, but not both. To use the modified version, the taxpayer must resubmit a signed duplicate copy to the IRS in Ogden, Utah, with a required legend at the top of page 1 citing Section 6.02(2)(b) of Revenue Procedure 2026-32.
Pending non-automatic Forms 3115. If a Form 3115 filed under the non-automatic procedures was pending with the IRS national office on September 21, 2026, the taxpayer may convert it to the automatic procedure. The taxpayer must notify the national office before the later of October 21, 2026 or the issuance of the IRS’s letter ruling, and must then resubmit a conforming Form 3115 by the earlier of 30 days after the IRS’s acknowledgment letter or the duplicate-copy due date. If the Form 3115 is converted, the IRS returns the user fee.

Taxpayers with filings in either category should confirm their timing now, since the conversion window is short.

What companies should review before filing

Technology, software and life sciences businesses should reconcile their current R&E position with the updated procedural rules before the filing posture is locked. Key questions:

How are the remaining unamortized amounts from 2022 through 2024 domestic costs being recovered, and which OBBBA recovery method was elected?
Are 2025 and 2026 domestic costs being deducted under Section 174A or capitalized under a Section 174A(c) election?
Where do research activities physically occur, and are foreign costs receiving 15-year treatment?
Has a method-change filing or statement been prepared under the correct procedure, and does its timing fit the effective date and transition rules?
Do any pending non-automatic Forms 3115 make sense to convert?

Companies preparing tax provisions should also confirm that book-to-tax schedules, deferred tax calculations and return positions reflect the same implementation method.

How Aura Advisors can help with R&E accounting method changes

Revenue Procedure 2026-32 does not require companies to rethink the entire Section 174 strategy. It does require them to confirm that the mechanics used to implement that strategy remain supportable under the updated IRS procedures.

Aura Advisors can help companies map domestic and foreign R&E costs, review prior capitalization and transition elections, calculate applicable Section 481(a) adjustments, determine the appropriate automatic-change procedure and coordinate the tax return, Form 3115 or statement-in-lieu filing with the company’s broader R&E position.

For companies that have already made a planning decision, the next step is to test whether the implementation matches it.

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