IRS Expands Accounting Method Change Relief for Research Expenditures

By Gilbert Gomez, CPA | Insights

Revenue Procedure 2026-32 extends relief from certain IRS accounting method change restrictions, helping businesses navigate changes to the tax treatment of research and software development costs.

Deadline to request conversion of certain pending non-automatic Form 3115 applications to automatic procedures is October 21, 2026

Businesses have experienced significant changes in the federal income tax treatment of research and experimental (R&E) expenditures since 2022. Congress first required businesses to capitalize these costs rather than immediately deduct them, then generally restored immediate deductions for domestic research expenditures beginning in 2025. While much of the attention has centered on the deductions themselves, the IRS procedures businesses must follow when changing their tax accounting methods deserves further consideration. In September 2026, the IRS issued Revenue Procedure 2026-32, expanding existing relief for certain accounting method changes. Understanding why this guidance matters requires examining how the rules developed.

Before 2022, businesses generally could deduct qualifying R&E expenditures as incurred under §174, although capitalization and amortization options were available. The Tax Cuts and Jobs Act (TCJA) changed that treatment for taxable years beginning after December 31, 2021. Businesses were required to capitalize research expenditures and amortize them over five years for domestic research or 15 years for foreign research. The requirements also included qualifying software development costs, whether the software was intended for internal business operations or commercial use.

The rules changed again in July 2025 when Congress enacted Public Law 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA). The legislation introduced §174A, generally restoring immediate deductions for qualifying domestic research expenditures in taxable years beginning after December 31, 2024. Businesses may alternatively elect capitalization and amortization over at least 60 months. Foreign research expenditures remain subject to capitalization and 15-year amortization under §174.

Consequently, businesses that changed their accounting methods to comply with the 2022 requirements could find themselves needing another change just a few years later. That created an administrative complication.

Changing an Accounting Method Requires IRS Consent.

Consider a business that historically deducted domestic software development costs as incurred. Beginning in 2022, federal tax law required the business to capitalize those expenditures and amortize them over five years. The business changed its accounting method to comply. Three years later, the law changed again, generally allowing immediate deductions beginning in 2025. Although the new law permits immediate deductions, changing an established tax accounting method can still require IRS consent under §446(e).

The IRS provides two principal procedures for obtaining that consent.

Under the automatic procedure, qualifying taxpayers follow published requirements, generally including Form 3115, Application for Change in Accounting Method, without obtaining an individual IRS ruling. Certain changes permit a prescribed statement instead.

Under the non-automatic procedure, taxpayers generally must apply for individual IRS consent, pay a user fee, and receive an approving ruling.

An important restriction appears in Revenue Procedure 2015-13, §5.01(1)(f). Under this provision, a taxpayer generally cannot use the automatic procedure if it has changed, or requested consent to change, its accounting method for the same item during the five-taxable-year period ending with the requested year of change, unless an exception applies. This is an eligibility restriction, not a requirement to retain an accounting method for five years. For businesses that changed their research accounting methods beginning in 2022, the restoration of domestic expensing in 2025 could create another change within that five-year period. Without an applicable exception, those businesses might need to pursue the more extensive non-automatic consent process.

There is an important distinction between the tax law and the procedures used to comply with it. Congress determines whether qualifying research expenditures may be deducted immediately or must be capitalized. The IRS establishes procedures for obtaining consent when taxpayers change established accounting methods.

The IRS had already established automatic accounting method change procedures for research expenditures under earlier guidance, including Revenue Procedures 2025-23 and 2025-28. Those procedures also provided exceptions to certain eligibility restrictions.

Revenue Procedure 2026-32 expands and extends that existing relief.

Specifically, it modifies Section 7 of Revenue Procedure 2025-23 to make the restrictions under Revenue Procedure 2015-13, §§5.01(1)(d) and (f), inapplicable to specified research expenditure changes for taxable years beginning before January 1, 2028. These exceptions address the five-year restriction on repeated changes and certain restrictions involving a taxpayer's final year of business. Although the eligibility relief extends through taxable years beginning before 2028, certain §174A automatic changes remain subject to separate limitations on the permitted year of change. The guidance also expands automatic change availability for certain foreign research expenditures and permits specified corrections of impermissible accounting methods used for only one taxable year. The result is greater flexibility for qualifying taxpayers to implement appropriate accounting methods without obtaining individual IRS approval. However, the relief does not eliminate every eligibility requirement or extend every filing deadline. Taxpayers must still qualify under the applicable automatic change provision and comply with its requirements.

Regarding previously capitalized research costs, the 2025 legislation also addressed domestic research expenditures that required capitalization during 2022 through 2024. Under Public Law 119-21, §70302(f)(2)(A), qualifying taxpayers may elect to deduct their remaining unamortized domestic R&E expenditures entirely in the first taxable year beginning after December 31, 2024, or ratably over that year and the following taxable year. For a calendar-year business, those alternatives generally mean deducting the remaining balance in 2025 or spreading it equally across 2025 and 2026.

For example, assume a corporation had $200,000 of remaining unamortized domestic software development costs entering 2025.

Subject to the applicable requirements and a valid election, the corporation could deduct the entire $200,000 in 2025 or deduct $100,000 in each of 2025 and 2026.

This recovery provision applies to qualifying domestic software development expenditures. Foreign research costs are excluded.

A separate retroactive election was also provided for certain qualifying small businesses.

Revenue Procedure 2026-32 also addresses adjustments under §481(a). When a taxpayer changes an established accounting method, IRC §481(a) generally requires an adjustment to prevent income or deductions from being duplicated or omitted.

A positive §481(a) adjustment increases taxable income, while a negative adjustment reduces it. Under ordinary automatic accounting method change procedures, positive adjustments generally are recognized over four taxable years, while negative adjustments generally are recognized in the year of change.

Revenue Procedure 2026-32 modifies the treatment of certain positive adjustments involving domestic research expenditures subject to the earlier TCJA version of §174.

When a taxpayer concurrently changes its accounting method under those rules and adopts the statutory recovery method for unamortized domestic research expenditures, a net positive adjustment generally follows the same one-year or two-year period selected for recovering those costs. Special coordination rules also apply when the recovery method was adopted in an earlier taxable year. The timing can have important tax consequences.

Under the previous procedures, a qualifying taxpayer might have recognized a positive §481(a) adjustment over four years. Under the revised procedures, the same adjustment could be recognized over one or two years, accelerating taxable income and potentially increasing taxes in earlier years. Where the applicable transition rules permit a choice between procedures, businesses should compare the resulting tax consequences before filing.

The distinction between these provisions is important. The statutory one-year or two-year election allows taxpayers to recover domestic research expenditures that were properly capitalized under the earlier tax law, without creating a §481(a) adjustment for that election. However, if the taxpayer must also change a previously established accounting method, such as correcting the improper deduction of costs that should have been capitalized, a separate §481(a) adjustment may be required. Revenue Procedure 2026-32 provides special rules for coordinating that adjustment with the statutory recovery period.

Revenue Procedure 2026-32 includes two transition dates affecting certain accounting method change applications.

October 21, 2026: Taxpayers with qualifying non-automatic Form 3115 applications submitted before September 21, 2026, and still pending with the IRS National Office on September 21, may request conversion to the automatic procedures. Notification must occur before the later of October 21 or issuance of the applicable IRS ruling. Taxpayers with qualifying pending applications should review their eligibility for conversion and the applicable notification requirements before the deadline.

November 15, 2026: This deadline applies to taxpayers who properly file the required duplicate copy of Form 3115 for certain research expenditure or construction-related accounting method changes under the procedures that existed before Revenue Procedure 2026-32.

If the taxpayer files the duplicate copy by November 15, remains eligible under the revised rules, and has not yet filed its original federal income tax return for the year of change, the taxpayer may choose to implement the change under either the earlier or revised procedures.

This choice can affect the timing of taxable income. For example, certain positive §481(a) adjustments that previously could have been recognized over four years may instead be recognized over one or two years under the revised procedures.

Taxpayers choosing the revised procedures must resubmit a properly identified duplicate Form 3115 to the IRS. The transition rule does not extend otherwise applicable filing deadlines.

Neither transition date represents a universal deadline for changing research expenditure accounting methods.

Businesses should also review state income tax conformity before implementing these changes. States do not necessarily adopt federal changes to §§174 and 174A, and some may continue to require capitalization and amortization even when immediate deductions are permitted federally. Separate state tax adjustments and amortization schedules may therefore be necessary.

Businesses should review their prior accounting method changes, capitalized research and software development costs, remaining amortization balances, and applicable transition elections.

For businesses preparing financial statements under U.S. GAAP, the tax treatment under §§174 and 174A also remains separate from applicable financial reporting requirements for software development expenditures. See our Insights article on software development costs under ASC 350-40.

Revenue Procedure 2026-32 additionally modifies accounting method change procedures for certain residential construction contracts under §460(e), which involve separate requirements.

How Gomez CPA Can Help

The successive changes to research expenditure accounting demonstrate why applying a new tax deduction can involve more than updating a tax return.

Businesses must also consider previously capitalized expenditures, established accounting methods, IRS consent requirements, and the timing of deductions.

Gomez CPA assists businesses with reviewing research expenditure treatment, reconciling capitalization schedules, evaluating accounting method change requirements, and assessing the related federal income tax consequences.

Revenue Procedure 2026-32 provides additional flexibility, but the appropriate treatment depends on each business's filing history, accounting methods, and applicable elections. Businesses with pending Form 3115 applications should pay particular attention to the October 21 transition deadline.

Sources

• Public Law 115-97, §13206(a), Tax Cuts and Jobs Act (2017).
• Public Law 119-21, §70302, including the transition elections under §70302(f) (2025).
• Internal Revenue Code §174, Amortization of Research and Experimental Expenditures, and §174A, Domestic Research or Experimental Expenditures.
• Internal Revenue Code §446(e), Consent to Change Accounting Methods, and §481(a), Adjustments Required by Changes in Accounting Method.
• Internal Revenue Code §460(e), Special Rules for Certain Long-Term Contracts.
• IRS Revenue Procedure 2015-13, General Accounting Method Change Procedures and Eligibility Rules.
• IRS Revenue Procedure 2025-23, Automatic Accounting Method Changes, Section 7.
• IRS Revenue Procedure 2025-28, Research Expenditure Accounting Methods and Transition Elections.
• IRS Revenue Procedure 2026-32, Expanded Automatic Accounting Method Change Procedures.
• FASB Accounting Standards Codification, ASC 350-40, Internal-Use Software.

Disclaimer

This article is intended for general informational and educational purposes only and does not constitute tax, accounting, legal, or other professional advice. The application of §§174, 174A, 446, and 481, including accounting method change eligibility, transition elections, and §481(a) adjustments, depends on a taxpayer's specific facts, prior accounting methods, elections, filing history, and applicable federal and state tax law. Filing deadlines and IRS guidance may change. Taxpayers should consult a qualified tax professional regarding their circumstances before making an election or filing Form 3115.

Information and references are current as of October 2026.

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