Revenue Procedure 2026-32: New Guidance Clarifies Research Expenditure Accounting Method Changes

Section 174A vs. Section 174: Key Changes for Domestic and Foreign Research Expenditures

The enactment of IRC Section 174A changed the federal income tax treatment of domestic research or experimental expenditures for taxable years beginning after December 31, 2024. Rev. Proc. 2026-32 supplies important procedural guidance for taxpayers that are implementing those rules for 2026 and 2027. These include taxpayers that:

• Previously capitalized domestic specified research or experimental (SRE) expenditures under the TCJA rules.
• Elected transition relief under the P.L. 119-21, commonly known as the “One Big Beautiful Bill Act” (OBBBA).
• Have not been on a permissible method of accounting, including undercapitalizing such expenditures.

Taxpayers in the above examples may benefit from reviewing their accounting methods in light of Rev. Proc. 2026-32.

Domestic and Foreign Research Expenditures Now Follow Different Rules

For taxable years beginning after December 31, 2021, and before January 1, 2025, Section 174 required taxpayers to capitalize specified research or experimental expenditures. Domestic expenditures were generally amortized over five years, while expenditures attributable to foreign research were amortized over 15 years. Both recovery periods applied a midpoint convention.

Domestic Research Expenditures Under New Section 174A

For amounts paid or incurred in taxable years beginning after December 31, 2024, new Section 174A generally permits taxpayers to deduct domestic research or experimental (R&E) expenditures in the taxable year paid or incurred. Taxpayers may instead elect to capitalize eligible domestic expenditures and amortize them over a period of at least 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures. The election must be made by the due date of the federal income tax return, including extensions.

Continued Capitalization Requirements for Foreign Research Expenditures

Foreign research expenditures remain governed by Section 174. Those costs must continue to be capitalized and amortized over 15 years using the midpoint convention. Rev. Proc. 2026-32 removes the earlier limitation that restricted the automatic accounting method change for foreign research expenditures to taxable years beginning before January 1, 2026. Rev. Proc. 2026-32 extends the availability of the change to comply with IRC Section 174, as amended by the OBBBA, for foreign R&E expenditures to 2026 and subsequent tax years.

Automatic Accounting Method Changes Available for Foreign R&E Expenditures

The Rev. Proc. outlines procedures available to taxpayers that want to:

• Comply with TCJA Section 174 for foreign R&E expenditures paid or incurred in tax years beginning before January 1, 2025.
• Rely on interim guidance in Sections 3, 4, 5, 6 or 7 of Notice 2023-63, as modified by Notice 2024-12, for foreign R&E expenditures.
• Comply with the changes made to TCJA Section 174 by the OBBBA for foreign R&E expenditures paid or incurred in tax years beginning after December 31, 2024.

When Does Implementing Section 174A Require an Accounting Method Change?

A change in the treatment of domestic or foreign research expenditures is generally a change in accounting method governed by Sections 446 and 481. Rev. Proc. 2026-32 modifies the automatic change procedures in Rev. Proc. 2025-23, as previously modified by Rev. Proc. 2025-28.

New Form 3115 Relief and Statement Filing Procedures

For certain domestic research expenditure changes, taxpayers may use a statement in lieu of a complete Form 3115 for the 2025 tax return. The statement is treated as a Form 3115 for purposes of the automatic change procedures, and the duplicate-copy filing requirement is waived. The designated automatic accounting method change number for many of these domestic research expenditure changes is 273.

The statement generally identifies the taxpayer, the applicable designated change number, the method being adopted, and whether the taxpayer will currently deduct domestic expenditures under Section 174A(a) or capitalize and amortize them under Section 174A(c). A taxpayer selecting capitalization must also identify the chosen amortization period.

Section 481(a) Implications of the Transition to Section 174A

The transition to Section 174A generally applies on a cut-off basis to domestic expenditures paid or incurred in taxable years beginning after December 31, 2024. The change therefore generally does not produce a Section 481(a) adjustment for post-2024 domestic expenditures. A special modified cut-off rule applies to certain short taxable years beginning after December 31, 2024, and ending before July 4, 2025.

Tracking and Documentation Requirements for Research Expenditures

Taxpayers should maintain procedures that identify where research activities are performed and segregate the related wages, contractor costs, software development expenditures, supplies, cloud costs and allocable indirect expenditures.

Recovering Unamortized Section 174 Balances From 2022 Through 2024

One-year vs. Two-year Recovery Elections for Domestic Research Costs

Many taxpayers entered 2025 with unamortized domestic research expenditures from 2022 through 2024. The transition rules allow a taxpayer to deduct the remaining domestic amount in full in the first taxable year beginning after December 31, 2024, or ratably over the two-taxable-year period beginning with that year (i.e., 2025 and 2026).

Calculating Section 481(a) Adjustments Under Revenue Procedure 2026-32

Rev. Proc. 2026-32 provides guidance as to how taxpayers should calculate the modified Section 481(a) adjustment associated with the Section 174 correction when filing a Form 3115, Change in Accounting Method, in 2026 or 2027. The calculation must reflect the method the taxpayer selected to recover their unamortized SREs under TCJA (i.e., one or two years rather than the traditional four-year spread).

Recovery Period Rules for Taxpayers That Did Not Elect Acceleration

If the option to accelerate the unamortized domestic Section 174 balance in 2025 was not elected by the taxpayer with an election statement on the tax return, then the recovery period is the normal four years for an unfavorable and one year for favorable Section 481(a) adjustments.

Potential Tax Attribute and Limitation Considerations

The favorable and unfavorable adjustments being taken in a single- or two-year period would possibly affect other tax attributes or other limitations. However, the intent of Rev. Proc. 2026-32 was to prevent distortions or duplications for taxpayers as they transition from capitalization under TCJA section 174 to the deduction regime provided under Section 174A.

Areas To Review Before Accelerating Remaining Section 174 Balances

Before accelerating a remaining balance, taxpayers should confirm that the original capitalized amounts were properly determined. Areas that often merit review include software development costs, contractor expenditures, indirect cost allocations, research performed outside the United States, and differences between tax return schedules and the underlying general ledger.

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Revenue Procedure 2026-32 Creates New Opportunities to Correct Prior Section 174 Methods

For taxpayers that failed to capitalize SRE expenditures or undercapitalized Section 174 amounts under TCJA rules, Rev. Proc. 2026-32 allows taxpayers to change to a permissible method of accounting for domestic SRE expenditures under TCJA while beginning to expense domestic SRE expenditures for tax years beginning on or after January 1, 2025, under OBBBA.

Expanded Automatic Consent Relief Through 2027

Rev. Proc. 2026-32 waives certain eligibility restrictions under Rev. Proc. 2015-13 for qualifying domestic, transition, and foreign research method changes made for taxable years beginning before January 1, 2028. Specifically, Rev. Proc. 2026-32 extends the waiver of the eligibility rules in Section 5.01(1)(d) and Section 5.01(1)(f) of Rev. Proc. 2015-13 for changes made under Sections 7.01(1)(a), 7.02(3) and 7.03(1)(a) of Rev. Proc. 2025-23. The eligibility rule in Section 5.01(1)(d) prohibits method changes from being made under the automatic consent procedures in the final year of the applicant's trade or business. The eligibility rule in Section 5.01(1)(f) prohibits method changes from being made under the automatic consent procedures if the applicant made a change for the same item within the prior five years. It also permits certain changes when the taxpayer used an impermissible method for only one prior taxable year.

Transition Rules for Pending and Previously Filed Method Changes Requests

The modified procedures generally apply to Forms 3115 filed after September 4, 2026. Rev. Proc. 2026-32 also includes transition rules for certain duplicate Forms 3115 filed on or before November 15, 2026, and for certain pending nonautomatic requests filed before September 21, 2026. A qualifying taxpayer with a pending nonautomatic request may elect to convert it to an automatic change, subject to the applicable notice and refiling requirements.

Section 174A and Section 41 Research Credits: Understanding the Differences

Rev. Proc. 2026-32 does not change the substantive requirements for claiming the research credit under Section 41. It does not modify the four-part test, the qualified research expense rules, the funded research exclusion, the exclusion for research conducted outside the United States, or the payroll tax credit provisions.

Why Section 174A Dedications Do Not Automatically Qualify for the Research and Development (R&D) Tax Credit

Section 174A and Section 41 serve different purposes and apply different standards. A domestic research expenditure deductible under Section 174A is not automatically a qualified research expense under Section 41. A credit study also does not establish the taxpayer’s complete Section 174A or foreign Section 174 cost population.

Coordinating Section 174A Compliance With Section 41 Credit Studies

Taxpayers should coordinate data collection while maintaining separate technical analyses. A well-structured review should identify qualified research expenses under Section 41, domestic research expenditures under Section 174A, foreign research expenditures subject to Section 174, remaining unamortized domestic balances from 2022 through 2024, reconciling items among the cost populations, and any required accounting method changes or elections.

Section 174A Compliance Checklist: Recommended Next Steps for Taxpayers

Taxpayers with research expenditures should review their positions before filing 2025, 2026 and 2027 tax returns. The review should determine whether historic Section 174 balances are accurate, whether remaining domestic balances should be recovered over one or two years, whether a statement in lieu of Form 3115 is available, and whether foreign research costs remain properly tracked.

Managing the Transition from TCJA Capitalization to Section 174A Expensing 

Rev. Proc. 2026-32 provides the filing framework for the transition from mandatory domestic capitalization to Section 174A while preserving the capitalization requirement for foreign research. Coordination among the taxpayer’s tax accounting, research credit, international tax, and financial reporting teams can reduce inconsistencies and support the selected methods and elections.

Your Guide Forward

Cherry Bekaert’s Tax Credits & Incentives Advisory (TCIA) practice can assist taxpayers with the transition to Section 174A and the accounting method change procedures in Rev. Proc. 2026-32. TCIA can evaluate domestic and foreign research expenditures, validate remaining unamortized Section 174 balances from 2022 through 2024, model the available recovery alternatives, and assist with elections, Section 481(a) calculations, statements in lieu of Form 3115, and other method change requirements.

TCIA can also coordinate these analyses with federal and state research credit studies under Section 41, using consistent source data while maintaining the separate technical standards and documentation required under each provision. This approach helps taxpayers identify available benefits, address prior-year compliance issues, and establish a supportable process for future research expenditures.

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