New IRS Guidance Updates Section 174 Method Change Procedures

The IRS has released Revenue Procedure 2026-32, which provides important guidance for taxpayers correcting their treatment of domestic research expenditures under Section 174 for the 2022 through 2024 tax years on their 2025 tax return.

Coordinating 481(a) Adjustments and Accelerated Deductions

As part of the Tax Cuts and Jobs Act, taxpayers were required to amortize their domestic research expenditures over 5 years from tax years 2022 through 2024. Full domestic research expensing was restored beginning in tax year 2025 through the One Big Beautiful Bill Act (OBBBA). The OBBBA also allows taxpayers to recover the remaining unamortized domestic research expenditures from 2022 through 2024 in the first taxable year after December 31, 2024 or ratably over 2 years.

If a taxpayer did not amortize their domestic research expenditures over 2022 through 2024 and instead deducted them in full, then a separate accounting method correction is needed to recognize this disparity. This correction typically produces a positive 481(a) adjustment that is spread over 4 years. If a taxpayer performs this correction and also elects the acceleration deduction provision, it can potentially create a timing situation where a taxpayer recognizes a large deduction in 2025 or 2025 and 2026, and then realizes the subsequent income adjustments over the next 2 to 3 years.

Revenue Procedure 2026-32 modifies this strategy by requiring taxpayers that are making both changes to use the same period for the accelerated deduction and the positive 481(a) adjustment. If a taxpayer uses the 1-year accelerated deduction, then they must recognize the positive 481(a) adjustment entirely in that year. If a taxpayer chooses the 2-year option, then they would recognize the positive 481(a) adjustment in those years. This new coordination rule prevents taxpayers from accelerating the remaining deductions while deferring the corresponding income adjustment.

A taxpayer that does not elect the catch-up option generally continues the original amortization schedules and would spread their positive 481(a) adjustment over the normal 4-year period.

Form 3115 and the 9/15 Deadline

Revenue Procedure 2026-32 generally applies to Forms 3115 filed after September 4, 2026, but provides transition relief for certain taxpayers. A taxpayer that has not yet filed its 2025 federal income tax return may continue applying the prior guidance if it properly files the duplicate Form 3115 by November 15, 2026. This allows the taxpayer to retain a four-year positive Section 481(a) adjustment period while claiming the one-year accelerated deduction for its remaining unamortized domestic research expenditures.

Alternatively, an eligible taxpayer that has submitted a Form 3115 under the prior guidance but has not yet filed its 2025 return may elect to apply the revised rules, under which the positive Section 481(a) adjustment period must match the selected one- or two-year catch-up period.

The November 15 transition rule does not extend the deadline for filing the taxpayer’s 2025 return or the original Form 3115. With the September 15 deadline approaching for many extended business returns, taxpayers should promptly review their existing accounting methods, OBBBA catch-up elections, and any Forms 3115 already filed or in process.

Please contact McGuire Sponsel to discuss how this guidance may affect your 2025 filings.

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