Rev. Proc. 2026-32 provides new opportunities for taxpayers transitioning to section 174A
Taxpayers that did not fully comply with the TCJA’s capitalization requirements for domestic specified research or experimental expenditures may have a new opportunity to correct their accounting methods while transitioning to current deductions under section 174A.
Rev. Proc. 2026-32 expands access to automatic accounting method changes and clarifies how certain section 481(a) adjustments interact with the recovery of unamortized domestic research expenditures. The guidance may provide a more efficient path to compliance and, in some circumstances, additional audit protection.
The IRS guidance, released Sept. 4, 2026, modifies the automatic accounting method change procedures in Rev. Proc. 2025-23, as previously modified by Rev. Proc. 2025-28. It reflects statutory changes enacted by the OBBBA and provides additional procedural relief for taxpayers implementing those changes.
How the OBBBA changed section 174 research expensing
The TCJA required taxpayers beginning in 2022 to capitalize and amortize specified research or experimental (SRE) expenditures over five years for domestic research and 15 years for foreign research.
The OBBBA subsequently reversed that treatment for domestic research expenditures beginning in tax years after Dec. 31, 2024. Under new section 174A, taxpayers can choose either to deduct domestic research expenditures or capitalize and amortize them over a period of not less than 60 months. Foreign research expenditures remain subject to capitalization and 15-year amortization under revised section 174.
To facilitate implementation of these statutory changes, the IRS previously released automatic accounting method change procedures in Rev. Proc. 2025-23 and Rev. Proc. 2025-28. Rev. Proc. 2026-32 builds on that framework by expanding eligibility and clarifying how taxpayers should calculate and report certain section 481(a) adjustments.
Correcting section 174 methods while transitioning to section 174A
For taxpayers that failed to capitalize SRE expenditures—or did not capitalize an adequate amount—under TCJA rules, the revenue procedure permits 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.
The guidance also explains how taxpayers should calculate the modified section 481(a) adjustment associated with the correction. The calculation must reflect the method the taxpayer selected to recover their unamortized SREs under TCJA.
If a taxpayer did not choose to accelerate the unamortized domestic section 174 balance in 2025, then the recovery period is the normal four years for unfavorable, and one year for favorable, section 481(a) adjustments.
For example: If after implementing the TCJA changes, the section 481(a) is an unfavorable $100x and the taxpayer chose to recover the domestic SRE expenditures in full in 2025, the taxpayer would recover the section 481(a) adjustment of $100x into income and have an additional amortization expense of $100x—all in 2025.
While ultimately it would cancel out, it could impact tax attributes or other limitations. These rules are intended to prevent distortions or duplications that could arise as taxpayers transition from capitalization under TCJA section 174 to the deduction regime provided under section 174A.
Expanded accounting method change relief through 2027
Rev. Proc. 2026-32 also extends taxpayer relief from certain automatic accounting method change eligibility restrictions.
For tax years beginning before Jan. 1, 2028, the guidance waives restrictions that generally apply when a taxpayer is in the final year of a trade or business or has changed the same accounting method within the previous five tax years.
The relief applies to accounting method changes involving:
- Domestic SRE expenditures under the TCJA rules
- Domestic research or experimental expenditures under section 174A and related OBBBA transition provisions
- Foreign research or experimental expenditures under section 174
The extended waiver may give taxpayers additional flexibility to correct prior treatment or implement OBBBA-related changes without being constrained by the normal automatic change limitations. Taxpayers that previously delayed an accounting method change or were ineligible because of the usual restrictions may benefit from reassessing their options.
Key considerations for taxpayers affected by section 174 changes
Taxpayers that capitalized domestic SRE expenditures under the TCJA rules, elected transition relief under the OBBBA, or have not been on a permissible method of accounting for those expenditures may benefit from reviewing their accounting methods in light of Rev. Proc. 2026-32.
Taxpayers that undercapitalized their domestic section 174 costs in 2022 through 2024 and still have time to make a change, including corporations and fiscal year taxpayers, may find an additional benefit in an increased section 163(j) limitation in 2025.
That review may include determining whether prior treatment requires correction and whether the expanded automatic change procedures offer an efficient path to compliance. Taxpayers may also want to evaluate how the timing of a section 481(a) adjustment and the recovery of unamortized domestic research expenditures could affect other tax attributes or limitations.
The extension of the eligibility waivers through tax years beginning before Jan. 1, 2028, gives taxpayers additional time to assess their options. Those that previously delayed an accounting method change or encountered procedural restrictions may now have another opportunity to make the change under the automatic consent procedures.
Applying Rev. Proc. 2026-32 to your accounting method strategy
Rev. Proc. 2026-32 offers taxpayer-friendly procedural relief, but applying it requires an understanding of a taxpayer’s prior section 174 treatment, their OBBBA transition choices and any accounting method changes already made.
An experienced tax advisor can help evaluate those facts, identify available automatic change procedures and model the timing and potential effects of the related section 481(a) adjustment.
For taxpayers that may not have fully complied with the TCJA rules, that analysis can help determine whether correcting the method under the expanded procedures could provide audit protection. It can also help taxpayers coordinate the correction with their broader approach to domestic research expenditures under section 174A.
