IRS Rev. Proc. 2025-28: New Planning Opportunity for Domestic Research & Experimental Expenditures

Prepared by: K-Co Finance
Subject: IRS guidance on domestic research and experimental expenditures under Rev. Proc. 2025-28
Client Focus: Business owners, founders, software developers, engineering companies, technology businesses, research-driven companies, and small businesses with domestic R&D activity

Executive Summary

The IRS released Revenue Procedure 2025-28 to provide procedural guidance for taxpayers seeking to apply new rules for domestic research or experimental expenditures under the One, Big, Beautiful Bill Act. The practical impact is significant for businesses that incurred domestic research and development costs during 2022, 2023, 2024, or expect to incur those costs beginning in 2025.

For many businesses, the prior tax regime required domestic research or experimental expenditures to be capitalized and amortized over five years, creating a cash-flow burden by delaying deductions. Rev. Proc. 2025-28 provides a pathway for certain taxpayers to deduct domestic research or experimental expenditures more favorably, make retroactive elections for prior years, or change their accounting method to align with the new rules. This creates an important planning window for eligible businesses to review prior tax filings, evaluate potential amended returns, and determine whether immediate deduction or capitalization and amortization produces the better tax result.

This memo is intended to explain the guidance in practical business terms. It should be reviewed with the taxpayer’s CPA, enrolled agent, or tax attorney before any election, amended return, or accounting method change is filed.

What Changed

Under the prior Tax Cuts and Jobs Act framework, businesses were generally required to capitalize specified research or experimental expenditures and amortize them over time. Domestic expenditures were generally amortized over five years, while foreign research expenditures were amortized over fifteen years. This was a major shift from the earlier framework that often allowed businesses to deduct qualifying research costs currently.

The new guidance under Rev. Proc. 2025-28 addresses how taxpayers can apply the updated domestic research expenditure rules. For taxable years beginning after December 31, 2024, domestic research or experimental expenditures may generally be deducted under new §174A, unless the taxpayer elects to capitalize and amortize those expenditures. Foreign research expenditures remain subject to the separate §174 framework and continue to be treated less favorably.

For clients, the main takeaway is that domestic research activity may now receive more favorable timing treatment. This does not automatically mean every company should deduct all domestic R&D costs immediately; the best approach depends on taxable income, loss utilization, investor reporting, credits, prior-year filings, cash-flow needs, and whether the business is eligible for retroactive relief.

Who This May Affect

This guidance may apply to companies that paid or incurred domestic research or experimental expenditures. This can include technology companies, software companies, engineering firms, product development businesses, manufacturing businesses, scientific research companies, and certain service businesses that build proprietary systems, tools, platforms, workflows, or technical processes.

Importantly, the IRS guidance confirms that software development costs are treated as research or experimental expenditures for purposes of §174A. This is relevant for companies building software platforms, internal technology, customer-facing applications, automation tools, data systems, or proprietary infrastructure.

The guidance is especially relevant for small business taxpayers that incurred domestic R&D costs in 2022, 2023, or 2024 and were required to capitalize those costs under the prior §174 framework. Eligible taxpayers may have an opportunity to revisit those prior years and potentially improve the tax treatment of those expenditures.

Small Business Retroactive Election

Rev. Proc. 2025-28 provides a special election for qualifying small business taxpayers. A small business taxpayer may elect to apply the new domestic research expenditure treatment retroactively to taxable years beginning after December 31, 2021. In practical terms, this may allow eligible businesses to revisit domestic R&D costs that were capitalized in 2022, 2023, and 2024.

This is important because a business that capitalized domestic R&D costs in prior years may have reported higher taxable income than it would have if the expenditures were deducted. Depending on the facts, an amended return or administrative adjustment request may produce a refund, reduce tax exposure, or improve the company’s tax position.

A taxpayer making the small business election generally must apply the election consistently across all applicable years in which it paid or incurred domestic research or experimental expenditures. This means the analysis should not be limited to one isolated year. The company should review all applicable years together before deciding whether to proceed.

Key Deadline

The small business retroactive election generally must be made no later than July 6, 2026. However, this deadline does not override the normal statute of limitations for refund claims. For some 2022 returns, the practical deadline may be earlier depending on when the return was filed and whether an extension applied.

For this reason, businesses that incurred domestic R&D costs in 2022 should prioritize review as soon as possible. Waiting until 2026 may create timing risk if the refund statute closes before the election deadline.

2025 and Future-Year Treatment

For taxable years beginning after December 31, 2024, businesses should evaluate whether they will deduct domestic research or experimental expenditures currently or elect to capitalize and amortize those costs under §174A(c). If a taxpayer elects capitalization and amortization, the amortization period must be at least 60 months and must begin with the month in which the taxpayer first realizes benefits from the expenditures.

This election must be made by attaching a statement to the taxpayer’s timely filed federal income tax return, including extensions, for the first taxable year to which the election applies. Once made, the elected method and amortization period generally must be followed for the year of election and subsequent years unless IRS consent is obtained to change the method or amortization period.

From a planning standpoint, current deduction may be attractive for businesses that are profitable and seeking to reduce taxable income. Capitalization and amortization may be more strategic where the business is managing losses, investor optics, credit calculations, state tax considerations, or timing of future income.

Coordination With the R&D Credit and §280C

Businesses claiming the research credit under §41 must also consider the §280C rules. Rev. Proc. 2025-28 addresses how the amended domestic research expenditure rules coordinate with §280C. Generally, taxpayers must avoid receiving both a full deduction and an unreduced research credit for the same expenditures.

The practical point is that businesses should not analyze the R&D deduction and the R&D credit separately. A company’s tax team should model both items together to determine whether the taxpayer should reduce deductions, elect a reduced credit, or evaluate other available treatment based on the year involved and the taxpayer’s specific facts.

Superseding Return Relief

Rev. Proc. 2025-28 also provides automatic extension relief for certain taxpayers with taxable years beginning during 2024 and ending before September 15, 2025, where the original due date was before September 15, 2025. This relief may allow eligible taxpayers to file superseding returns and furnish corresponding Schedules K-1, where applicable, before the extended due date.

This may be particularly relevant for partnerships, S corporations, C corporations, individuals with Schedule C businesses, trusts, estates, and certain exempt organizations. Businesses that already filed returns before fully evaluating the new guidance should determine whether superseding return relief is available before pursuing an amended return pathway.

K-Co Finance Planning View

This guidance creates a meaningful planning opportunity for businesses with domestic R&D activity. The opportunity is not only about tax compliance; it is also about cash-flow management, refund recovery, capital planning, and improving the way the business documents its investment in innovation.

For a founder or business owner, the review should answer four questions. First, did the company incur domestic research or experimental expenditures in 2022, 2023, 2024, or 2025? Second, were those costs capitalized under the prior §174 rules? Third, does the business qualify as a small business taxpayer for purposes of the retroactive election? Fourth, would immediate deduction, capitalization, or amended-return treatment produce the strongest financial result?

The answer will depend on the company’s tax profile, profitability, prior filings, state tax exposure, credit position, and future income expectations. A business with taxable income may benefit differently than a business with net operating losses. A business claiming the R&D credit may need more careful modeling because of the §280C interaction. A pass-through entity may also need to consider owner-level effects, amended K-1s, and investor communications.

Recommended Next Steps

K-Co Finance recommends that businesses with potential domestic R&D activity complete a targeted review of 2022 through 2025 expenditures. The review should identify software development costs, engineering labor, product development costs, contractor expenses, research supplies, technical design work, testing, prototype development, and other costs connected to qualified research or experimentation.

After the cost review, the business should work with its tax preparer to determine whether the small business retroactive election is available, whether amended returns or administrative adjustment requests should be filed, whether the 2025 method should be current deduction or capitalization, and whether any §280C election or R&D credit adjustment is needed.

For businesses with meaningful R&D spending, this should be treated as a near-term tax planning priority. The potential benefit may include improved deductions, refund opportunities, better cash-flow timing, and a more accurate tax position for future years.

Compliance Note

This memo is for educational and planning purposes only. It does not constitute tax, legal, or accounting advice. Taxpayers should consult their CPA, enrolled agent, or tax attorney before filing an election, amended return, superseding return, administrative adjustment request, or accounting method change.