IRS Issues Automatic Consent Procedures for Research and Experimental Expenditures

(Parker Tax Publishing September 2026)

The IRS issued procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for obtaining automatic consent to change methods of accounting for research or experimental expenditures (1) to comply with Code Sec. 174, as in effect after amendment by the Tax Cuts and Jobs Act (TCJA), and prior to amendment by the One, Big, Beautiful Bill Act (OBBBA), and (2) to comply with Code Secs. 174 and 174A, as amended and added by the OBBBA, respectively. Procedures are also provided for obtaining automatic consent to change methods of accounting for contracts entered into in tax years beginning after July 4, 2025, to comply with Code Sec. 460(e), as amended by the OBBBA. Rev. Proc. 2026-32.

Background

For expenditures paid or incurred in tax years beginning after December 31, 2021, Code Sec. 174, as in effect after amendment by the Tax Cuts and Jobs Act (TCJA) (Pub. L. 115-97) (TCJA Section 174), requires taxpayers to charge specified research or experimental (SRE) expenditures to capital account and allows amortization deductions of such capitalized expenditures ratably over a 5-year period in the case of SRE expenditures attributable to domestic research, or a 15-year period in the case of SRE expenditures attributable to foreign research, beginning with the midpoint of the tax year in which such expenditures are paid or incurred. The procedures in Sections 7.01 and 7.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, provide automatic changes in method of accounting for SRE expenditures under TCJA Section 174 for amounts paid or incurred in tax years beginning before January 1, 2025.

Section 70302(b)(1) of the One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21) amended TCJA Section 174 to provide that Code Sec. 174 applies only to foreign research or experimental expenditures and that such expenditures continue to be charged to capital account and amortized ratably over a 15-year period beginning with the midpoint of the tax year in which such expenditures are paid or incurred. The OBBBA amendments to TCJA Section 174 apply to amounts paid or incurred in tax years beginning after December 31, 2024.

Section 70302(a) of the OBBBA added Code Sec. 174A applicable to tax years beginning after December 31, 2024. Code Sec. 174A(a) provides that, notwithstanding Code Sec. 263, a deduction is allowed for any domestic research or experimental expenditures that are paid or incurred by the taxpayer during the tax year. Code Sec. 174A(b) provides that, for purposes of Code Sec. 174A, the term "domestic research or experimental expenditures" means research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business other than such expenditures that are attributable to foreign research. Code Sec. 174A(c)(1) allows a taxpayer to make an election, in the case of domestic research or experimental expenditures that would (but for Code Sec. 174A(a)) be chargeable to capital account but not chargeable to property of a character that is subject to the allowance under Code Sec. 167 (relating to allowance for depreciation, etc.) or Code Sec. 611 (relating to allowance for depletion), to charge such expenditures to capital account and amortize such expenditures ratably over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from such expenditures. Under Code Sec. 174A(c)(1), such election is made in accordance with regulations or other guidance provided by the IRS. Code Sec. 174A(c)(2) provides that the election described in Code Sec. 174A(c)(1) may be made for any tax year, but only if made no later than the time prescribed by law for filing the return for such tax year (including extensions thereof). The procedures in Section 6 of Rev. Proc. 2025-28 provide guidance on making an election under Code Sec. 174A(c) for expenditures paid or incurred in tax years beginning after December 31, 2024.

Code Sec. 460(a) generally requires taxpayers to use the percentage-of-completion method to determine taxable income from a long-term contract. Code Sec. 460(f)(1) defines a "long-term contract" as any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the tax year in which such contract is entered into. Under Code Sec. 460(e), the requirement to use the percentage-of-completion method and comply with associated rules does not apply to certain types of construction contracts (exempt construction contracts). Code Sec. 460(e)(3) defines a "construction contract" as any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property.

Prior to amendment by the OBBBA, Code Sec. 460(e)(1)(A) exempted taxpayers from the requirement to use the percentage-of-completion method for home construction contracts. Code Sec. 460(e)(1)(B) exempted taxpayers (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under Code Sec. 448(a)(3)) from the requirement to use the percentage-of-completion method for any other construction contract if (1) the taxpayer estimated at the time the contract was entered into that the contract would be completed within the 2-year period beginning on the contract commencement date, and (2) the taxpayer met the gross receipts test of Code Sec. 448(c) for the tax year in which the contract was entered into (small taxpayer exception).

Code Sec. 460(e)(4)(A), as previously contained in Code Sec. 460(e)(5)(A) prior to amendment by the OBBBA, defines the term "home construction contract" as any construction contract if 80 percent of the estimated total contract costs (as of the close of the tax year in which the contract was entered into) are reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of (1) dwelling units in buildings containing four or fewer units and (2) improvements to real property directly related to the dwelling units and located on the site of the dwelling units. For purposes of Code Sec. 460(e)(4)(A)(i), as previously contained in Code Sec. 460(e)(5)(A)(i) prior to amendment by the OBBBA, each townhouse or rowhouse is treated as a separate building. Taxpayers were permitted to account for home construction contracts using any exempt contract method under Reg. Sec. 1.460-4(c). Permissible exempt contract methods include the percentage-of-completion method, the exempt-contract percentage-of-completion-method (as described in Reg. Sec. 1.460-4(c)(2)), the completed contract method (as described in Reg. Sec. 1.460-4(d)), and any other permissible method. Under Code Sec. 460(e)(1), taxpayers were required to apply Code Sec. 263A to home construction contracts not accounted for under the percentage-of-completion method unless (1) the taxpayer estimated at the time the contract was entered into that the contract would be completed within the 2-year period beginning on the contract commencement date, and (2) the taxpayer met the gross receipts test of Code Sec. 448(c) for the tax year in which the contract was entered into.

Code Sec. 460(e)(4)(B), as previously contained in Code Sec. 460(e)(5)(B) prior to amendment by the OBBBA, defines the term "residential construction contract" as any contract that would be a home construction contract but for the limit on the number of dwelling units in a building. Under Code Sec. 460(e)(4), prior to its repeal by the OBBBA, taxpayers with residential construction contracts that were not home construction contracts were permitted to account for such contracts using the percentage-of-completion/capitalized-cost method under which the percentage-of-completion method was used for 70 percent of contract income and contract costs and an exempt contract method was used for 30 percent of contract income and contract costs.

The OBBBA did not modify the definitions of home construction contract or residential construction contract under Code Sec. 460(e). OBBBA Section 70430(a)(1)(A) amended Code Sec. 460(e)(1)(A) to extend the home construction contract exception to the requirement to use the percentage-of-completion method to apply to all residential construction contracts. Similarly, OBBBA Section 70430(a)(1)(B) amended Code Sec. 460(e)(1) to extend the requirement to apply Code Sec. 263A to a home construction contract that is not accounted for under the percentage-of-completion method to apply to all residential construction contracts unless (1) the taxpayer estimates at the time the contract is entered into that the contract will not be completed within the 2-year period beginning on the contract commencement date (3-year period beginning on the contract commencement date for residential construction contracts that are not home construction contracts), and (2) the taxpayer meets the gross receipts test of Code Sec. 448(c) for the tax year in which the contract is entered into. OBBBA Section 70430(a)(2) removed Code Sec. 460(e)(4), thereby eliminating the ability to use the percentage-of-completion/capitalized-cost method for residential construction contracts. The OBBBA amendments to Code Sec. 460(e) are effective for contracts entered into in tax years beginning after July 4, 2025.

Procedural Guidance Under Rev. Proc. 2025-28

In Rev. Proc. 2025-28, the IRS provided procedures for making certain elections under OBBBA Section 70302(f) with respect to domestic research or experimental expenditures. Rev. Proc. 2025-28 also modified procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for obtaining automatic consent to change methods of accounting for research or experimental expenditures under TCJA Section 174 and Code Secs. 174 and 174A.

Rev. Proc. 2025-28 modified Section 7 of Rev. Proc. 2025-23 in three ways. First, it modified Section 7.01 of Rev. Proc. 2025-23 to provide a change in method of accounting for domestic research or experimental expenditures under TCJA Section 174. Second, Section 7.02 of Rev. Proc. 2025-23 was modified to provide a change in method of accounting for domestic research or experimental expenditures under Code Sec. 174A and to make certain transition method changes under the OBBBA. Third, Section 7.03 of Rev. Proc. 2025-23 was added to provide a change in method of accounting for foreign SRE expenditures under TCJA Section 174 and foreign research or experimental expenditures under Code Sec. 174.

Changing Methods of Accounting Under Section 446(e)

Code Sec. 446(e) and Reg. Sec. 1.446-1(e)(2) require a taxpayer to secure the IRS's consent before changing a method of accounting for federal income tax purposes. Reg. Sec. 1.446-1(e)(3)(i) provides, in part, that except as otherwise provided under the authority of Reg. Sec. 1.446-1(e)(3)(ii), to secure IRS consent to a taxpayer's change in method of accounting the taxpayer generally must file a Form 3115, Application for Change in Accounting Method, during the tax year in which the taxpayer desires to make the change in method of accounting. Reg. Sec. 1.446-1(e)(3)(ii) authorizes the IRS to prescribe procedures under which taxpayers will be permitted to change their method of accounting. The procedures prescribe those terms and conditions necessary to obtain the IRS's consent to effect the change and to prevent amounts from being duplicated or omitted. Rev. Proc. 2015-13, as modified by later procedures, sets forth the procedures by which a taxpayer may obtain automatic consent to change a method of accounting described in the List of Automatic Changes. The current List of Automatic Changes is provided in Rev. Proc. 2025-23.

A change in the treatment of SRE expenditures to comply with TCJA Section 174 is a change in method of accounting to which Code Secs. 446(e) and 481, and the corresponding regulations, applying. Similarly, a change in a taxpayer's treatment of foreign or domestic research or experimental expenditures to comply with Code Secs. 174 or 174A, respectively, or to use certain transition options provided in OBBBA Section 70302(f), is a change in method of accounting to which Code Secs. 446(e) and 481, and the corresponding regulations, apply. A taxpayer that changes its method of accounting to comply with TCJA Section 174, Code Sec. 174, or Code Sec. 174A must use the accounting method change procedures in Rev. Proc. 2015-13 or its successor.

Rev. Proc. 2026-32

On September 4, the IRS issued Rev. Proc. 2026-32. The procedure modifies Section 7 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28, with respect to the procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for obtaining automatic consent to change methods of accounting for research or experimental expenditures (1) to comply with TCJA Section 174; and (2) to comply with Code Secs. 174 and 174A, as amended and enacted by the OBBBA, respectively. The procedure also modifies Section 19 of Rev. Proc. 2025-23 with respect to the procedures for obtaining automatic consent to change methods of accounting for contracts entered into in tax years beginning after July 4, 2025, to comply with Code Sec. 460(e), as amended by the OBBBA.

Changes in Method of Accounting for Research or Experimental Expenditures Under TCJA Section 174, Code Section 174, and Code Section 174A

Section 3.01 and .02 of Rev. Proc. 2026-32 modify Section 7.01 of Rev. Proc. 2025-23 (relating to a change in method of accounting for domestic research or experimental expenditures under TCJA Section 174) as follows:

(1) To provide that, if a taxpayer previously changed to the recovery of unamortized amount method described in Section 7.02(2)(f) of Rev. Proc. 2025-23 for a prior tax year, the taxpayer's Code Sec. 481(a) adjustment for a change under Section 7.01 of Rev. Proc. 2025-23 must reflect application of the taxpayer's recovery of unamortized amount method;

(2) To provide that, if a taxpayer makes both a change under Section 7.01 and Section 7.02(2)(f) of Rev. Proc. 2025-23 for its first tax year beginning after December 31, 2024, the Code Sec. 481(a) adjustment period for any net positive Code Sec. 481(a) adjustment resulting from the change under Section 7.01 of Rev. Proc. 2025-23 is the same amortization period elected by the taxpayer under its recovery of unamortized amount method (that is, the net positive Code Sec. 481(a) adjustment is taken into account either in full in the first tax year beginning after December 31, 2024, or ratably over the tax year period beginning with the first tax year beginning after December 31, 2024);

(3) To provide that, if a taxpayer previously made a change under Section 7.02(2)(f) of Rev. Proc. 2025-23 for a tax year prior to its year of change for a change under Section 7.01 of Rev. Proc. 2025-23, the Code Sec. 481(a) adjustment period for any net positive Code Sec. 481(a) adjustment resulting from the change under Section 7.01 of Rev. Proc. 2025-23 is taken into account over the amortization period remaining under the taxpayer's recovery of unamortized amount method; and

(4) To extend the waiver of the eligibility rules in Section 5.01(d) and (f) of Rev. Proc. 2015-13 for any change in method of accounting described in Section 7.01(1)(a) of Rev. Proc. 2025-23 for any tax year beginning before 2028.

Section 3.03 of Rev. Proc. 2026-32 modifies Section 7.02 of Rev. Proc. 2025-23 (relating to a change in method of accounting for domestic research or experimental expenditures under the OBBBA, including certain transition options) to extend the waiver of the eligibility rules in Section 5.01(d) and (f) of Rev. Proc. 2015-13 for any change in method of accounting described in Section 7.02(3) of Rev. Proc. 2025-23 for any tax year beginning before 2028.

Section 3.04 and .05 of Rev. Proc. 2026-32 modify Section 7.03 of Rev. Proc. 2025-23 (relating to a change in method of accounting for foreign research or experimental expenditures) as follows:

(1) To remove the limitation on the applicability of a change in method of accounting for foreign research or experimental expenditures to comply with Code Sec. 174 that currently limits such change to tax years beginning before January 1, 2026; and

(2) To extend the waiver of the eligibility rules in Section 5.01(d) and (f) of Rev. Proc. 2015-13 for any change in method of accounting described in Section 7.03(1)(a) of Rev. Proc. 2025-23 for any tax year beginning before 2028.

Changes in Method of Accounting for Residential Construction Contracts Under OBBBA

A change from the percentage-of-completion method described in Reg. Sec. 1.460-4(b) or the percentage-of-completion/capitalized-cost method described in Reg. Sec. 1.460-4(e) to an exempt contract method described in Reg. Sec. 1.460-4(c) for residential construction contracts to comply with Code Sec. 460(e)(1)(A) is a change in method of accounting to which Code Secs. 446(e) and 481, and the corresponding regulations, apply. Similarly, a change to start or stop capitalizing costs under Code Sec. 263A for residential construction contracts to comply with Code Sec. 460(e)(1) is a change in method of accounting to which Code Secs. 446(e) and 481, and the corresponding regulations, apply. A taxpayer that changes its method of accounting to comply with Code Sec. 460(e)(1) or to start or stop capitalizing costs under Code Sec. 263A pursuant to Code Sec. 460(e)(1) must use the accounting method change procedures in Rev. Proc. 2015-13 (or its successor).

Section 4.01 of Rev. Proc. 2026-32 modifies Section 19.01 of Rev. Proc. 2025-23 to allow a taxpayer to obtain automatic consent to stop capitalizing costs under Code Sec. 263A for residential construction contracts that meet the requirements of Code Sec. 460(e)(1)(B)(i) and (ii).

Section 4.02 of Rev. Proc. 2026-32 adds Section 19.03 of Rev. Proc. 2025-23, to allow a taxpayer to obtain automatic consent to change its method of accounting for residential construction contracts that are entered into in tax years beginning after July 4, 2025, (1) from the percentage-of-completion method of accounting or the percentage-of-completion/capitalized-cost method of accounting to an exempt contract method of accounting, or (2) to start capitalizing costs under Code Sec. 263A for contracts that do not meet the requirements of Code Sec. 460(e)(1)(B)(i) and (ii).

Effective Date

Sections 7, 19.01, and 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, are generally effective for a Form 3115 filed after September 4, 2026.

If, on or before November 15, 2026, a taxpayer properly files the duplicate copy of a Form 3115 for a change described in Section 7 or 19.01 of Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32, the Form 3115 is not subject to the September 4, 2026, effective date.

If, on or before November 15, 2026, a taxpayer properly files the duplicate copy of a Form 3115 for a change in method of accounting described in Section 7 or 19.01 of Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32, that continues to be eligible for the automatic change procedures under Section 7 or 19.01 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, but has not filed its timely filed (including extensions) original federal income tax return for the year of change implementing the change, the taxpayer may choose to implement the change as described in either (1) Section 7 or 19.01 of Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32, or (2) Section 7 or 19.01 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, but not both.

A taxpayer who meets the requirements of Section 6.02(2) of Rev. Proc. 2026-32 and chooses to implement the change as described in Section 7 or 19.01 of Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32, is not required to resubmit a duplicate copy of the Form 3115 to the IRS in Ogden, UT. However, if requested by the Director, the taxpayer must provide written substantiation that the duplicate copy of the Form 3115 was filed on or before November 15, 2026, pursuant to Section 6.03(1)(a)(i)(B) of Rev. Proc. 2015-13. Such written substantiation may include proof of mailing or faxing, as appropriate, of the duplicate copy of the Form 3115.

A taxpayer who meets the requirements of Section 6.02(2) of Rev. Proc. 2026-32 and chooses to implement the change as described in Section 7 or 19.01 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, must resubmit a duplicate copy (with signature) of the Form 3115 to the IRS in Ogden, UT, for the year of change under Rev. Proc. 2026-32, pursuant to the requirements of Section 6.03(1)(a)(i)(B) of Rev. Proc. 2015-13. The resubmitted duplicate copy must include the following statement on the top of page 1 of the Form 3115: "FILED UNDER REV. PROC. 2026-32, AS PROVIDED IN SECTION 6.02(2)(b) OF REV. PROC. 2026-32". For purposes of the eligibility rules in Section 5 of Rev. Proc. 2015-13, the duplicate copy of the resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the duplicate copy of the Form 3115 requesting the change under Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32. Section 6.02(2)(b) of Rev. Proc. 2026-32 does not extend the date the taxpayer must file either the resubmitted duplicate copy or original Form 3115 under Section 6.03(1)(a) of Rev. Proc. 2015-13. If requested by the Director, the taxpayer must provide written substantiation that the duplicate copy of the Form 3115 requesting the change under Rev. Proc. 2025-23, prior to modification by Rev. Proc. 2026-32, was filed on or before November 15, 2026, pursuant to Section 6.03(1)(a)(i)(B) of Rev. Proc. 2015-13. Such written substantiation may include proof of mailing or faxing, as appropriate, of the duplicate copy of the Form 3115.

If, before September 21, 2026, a taxpayer properly filed a Form 3115 under the non-automatic change procedures in Rev. Proc. 2015-13 requesting consent for a change in method of accounting described in Section 7, 19.01, or 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, and the Form 3115 is pending with the national office on September 21, 2026, the taxpayer may choose to make the change in method of accounting under the automatic change procedures in Rev. Proc. 2015-13 if the taxpayer is otherwise eligible to use the automatic method changes described in Section 7, 19.01, or 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, and the automatic change procedures in Rev. Proc. 2015-13. The taxpayer must notify the national office contact person for the Form 3115 (if unknown, fax the notification to 855-576-2341 or send the notification to the attention of Management Assistant (OA), CC:ITA:B07, Room 4136, at the address specified in Section 9.08(6) of Rev. Proc. 2026-1, of the taxpayer's intent to make the change in method of accounting under the automatic change procedures in Rev. Proc. 2015-13 before the later of (a) October 21, 2026, or (b) the issuance of a letter ruling granting or denying consent for the change. The notification should indicate that the taxpayer chooses to convert the Form 3115 to the automatic change procedures in Rev. Proc. 2015-13. If the taxpayer timely notifies the national office that it chooses to convert the Form 3115 to the automatic change procedures in Rev. Proc. 2015-13, the national office will send a letter to the taxpayer acknowledging its request and will return the user fee submitted with the Form 3115.

A taxpayer converting a Form 3115 to the automatic change procedures in Rev. Proc. 2015-13 for a change in method of accounting described in Section 7, 19.01, or 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, must resubmit a Form 3115 that conforms to the automatic change procedures, with a copy of the national office letter sent acknowledging the taxpayer's request attached, to the IRS in accordance with Section 9.06 of Rev. Proc. 2026-1 (or its successor), by the earlier of (a) the 30th calendar day after the date of the national office's letter acknowledging the taxpayer's request or (b) the date the taxpayer is required to file the duplicate copy of the Form 3115 under Section 6.03(1)(a)(i)(B) of Rev. Proc. 2015-13.

For purposes of the eligibility rules in Section 5 of Rev. Proc. 2015-13, the duplicate copy of the timely resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the converted Form 3115 under the non-automatic change procedures in Rev. Proc. 2015-13. Section 6.03 of Rev. Proc. 2026-32 does not extend the date the taxpayer must file the original (converted) Form 3115 under Section 6.03(1)(a)(i)(A) of Rev. Proc. 2015-13.

A Form 3115 filed under the non-automatic change procedures in Rev. Proc. 2015-13 before September 21, 2026, for a change in method of accounting described in Sections 7, 19.01 and 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, will be disregarded for purposes of the prior five-year change rules in Section 5.04 and 5.05 of Rev. Proc. 2015-13 if the taxpayer converts the Form 3115 to the automatic change procedures pursuant to Section 6.03 of Rev. Proc. 2026-32.

For a discussion of the deduction for research or experimental expenditures, see Parker Tax ¶95,500.

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