SECTION 2. BACKGROUND

.01 Certain references used in section 2 of this revenue procedure .

(1) References to § 70302 of the OBBBA . All references hereinafter in section 2 of this revenue procedure to “OBBBA § 70302” refer to provisions of § 70302 of the OBBBA.

(2) References to § 70430 of the OBBBA . All references hereinafter in section 2 of this revenue procedure to

“OBBBA § 70430” refer to provisions of § 70430 of the OBBBA.

(3) References to § 174 . All references hereinafter in section 2 of this revenue procedure to “TCJA § 174” refer to § 174, as in effect after amendment by § 13206(a) of the TCJA, and prior to amendment by OBBBA § 70302(b)(1). All references hereinafter in section 2 of this revenue procedure to “§ 174” refer to § 174 as amended by OBBBA § 70302(b)(1).

(4) References to research or exper- imental expenditures . All references hereinafter in section 2 of this revenue procedure to “specified research or experimental expenditures” and “SRE expenditures” refer to research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, under TCJA § 174. All references hereinafter in section 2 of this revenue procedure to “domestic research or experimental expenditures under TCJA § 174” refer to SRE expenditures other than SRE expenditures attributable to foreign research (within the meaning of § 41(d)(4)(F)).

.02 Treatment of research or experi- mental expenditures under TCJA § 174 .

(1) In general . For expenditures paid or incurred in taxable years beginning after December 31, 2021, TCJA § 174 requires taxpayers to charge 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 (within the meaning of § 41(d)(4)(F)), beginning with the midpoint of the taxable 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 this revenue procedure, provide automatic changes in method of accounting for SRE expenditures under TCJA § 174 for amounts paid or incurred in taxable years beginning before January 1, 2025.

(2) Treatment of foreign research or experimental expenditures under § 174 .

OBBBA § 70302(b)(1) amended TCJA § 174 to provide that § 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 taxable year in which such expenditures are paid or incurred. Under § 174(b), as amended by OBBBA § 70302(b)(1)(B), “foreign research or experimental expenditures” are research or experimental expenditures that are paid or incurred by the taxpayer during a taxable year in connection with the taxpayer’s trade or business that are attributable to foreign research (within the meaning of § 41(d)(4)(F)). OBBBA § 70302(e)(1) provides that the OBBBA amendments to TCJA § 174 apply to amounts paid or incurred in taxable years beginning after December 31, 2024.

(3) Treatment of domestic research or experimental expenditures under § 174A . OBBBA § 70302(a) amended part VI of subchapter B of chapter 1 of the Code by adding § 174A applicable to taxable years beginning after December 31, 2024. Section 174A(a) provides that, notwithstanding § 263, a deduction is allowed for any domestic research or experimental expenditures that are paid or incurred by the taxpayer during the taxable year. Section 174A(b) provides that, for purposes of § 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 (within the meaning of § 41(d)(4)(F)). Section 174A(c)(1) allows a taxpayer to make an election, in the case of domestic research or experimental expenditures that would (but for § 174A(a)) be chargeable to capital account but not chargeable to property of a character that is subject to the allowance under § 167 (relating to allowance for depreciation, etc.) or § 611 (relating to allowance for depletion), to charge such expenditures to capital account and amortize such expenditures ratably over a

1 Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

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period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from such expenditures. Under § 174A(c)(1), such election is made in accordance with regulations or other guidance provided by the Secretary of the Treasury or the Secretary’s delegate (Secretary). Section 174A(c)(2) provides that the election described in § 174A(c) (1) may be made for any taxable year, but only if made no later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). The procedures in section 6 of Rev. Proc. 2025-28 provide guidance on making an election under § 174A(c) for expenditures paid or incurred in taxable years beginning after December 31, 2024. OBBBA § 70302(e)(1) provides that, generally, the amendments made by OBBBA § 70302 to add § 174A to the Code apply to amounts paid or incurred in taxable years beginning after December 31, 2024.

.03 Treatment of Certain Construction Contracts under § 460.

(1) Section 460 in general . Section 460(a) generally requires taxpayers to use the percentage-of-completion method to determine taxable income from a longterm contract. Section 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 taxable year in which such contract is entered into. Under § 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). Section 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.

(2) Treatment of home construction contracts, residential construction con- tracts, and other construction contracts prior to OBBBA .

(a) Exempt construction contracts . Prior to amendment by the OBBBA, § 460(e)(1)(A) exempted taxpayers from the requirement to use the percentage-of-completion method for home construction contracts. Section 460(e)(1)(B) exempted taxpayers (other than a tax shel

ter prohibited from using the cash receipts and disbursements method of accounting under § 448(a)(3)) from the requirement to use the percentage-of-completion method for any other construction contract if (i) 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 (ii) the taxpayer met the gross receipts test of § 448(c) for the taxable year in which the contract was entered into (small taxpayer exception).

(b) Home construction contracts . Section 460(e)(4)(A), as previously contained in § 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 taxable year in which the contract was entered into) are reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of (i) dwelling units in buildings containing four or fewer units and (ii) improvements to real property directly related to the dwelling units and located on the site of the dwelling units. For purposes of § 460(e)(4)(A)(i), as previously contained in § 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 § 1.4604(c). Permissible exempt contract methods include the percentage-of-completion method, the exempt-contract percentage-of-completion-method (as described in § 1.460-4(c)(2)), the completed contract method (as described in § 1.460-4(d)), and any other permissible method. Under § 460(e)(1), taxpayers were required to apply § 263A to home construction contracts not accounted for under the percentage-of-completion method unless (i) 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 (ii) the taxpayer met the gross receipts test of § 448(c) for the taxable year in which the contract was entered into.

(c) Residential construction contracts . Section 460(e)(4)(B), as previously contained in § 460(e)(5)(B) prior to amend

ment 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 § 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.

(2) OBBBA amendments to § 460(e) . The OBBBA did not modify the definitions of home construction contract or residential construction contract under § 460(e). OBBBA § 70430(a)(1)(A) amended § 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 § 70430(a)(1)(B) amended § 460(e)(1) to extend the requirement to apply § 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 (i) 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 (ii) the taxpayer meets the gross receipts test of § 448(c) for the taxable year in which the contract is entered into. OBBBA § 70430(a)(2) removed § 460(e) (4) from the Code, thereby eliminating the ability to use the percentage-of-completion/capitalized-cost method for residential construction contracts. OBBBA § 70430(c) provides that the amendments to § 460(e) are effective for contracts entered into in taxable years beginning after July 4, 2025.

.04 Procedural guidance under Rev. Proc. 2025-28 .

(1) Revenue Procedure 2025-28 was released on August 28, 2025, to provide

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procedures for making certain elections under OBBBA § 70302(f) with respect to domestic research or experimental expenditures. Rev. Proc. 2025-28 also modifies procedures under § 446 and § 1.446-1(e) for obtaining automatic consent to change methods of accounting for research or experimental expenditures under TCJA § 174 and §§ 174 and 174A.

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

.05 Changing methods of accounting under § 446(e) .

(1) In general . Except as otherwise expressly provided in the Code and the regulations thereunder, § 446(e) and § 1.4461(e)(2) require a taxpayer to secure the consent of the Commissioner before changing a method of accounting for Federal income tax purposes. Section 1.446-1(e)(3)(i) provides, in part, that except as otherwise provided under the authority of § 1.4461(e)(3)(ii), to secure the Commissioner’s consent to a taxpayer’s change in method of accounting the taxpayer generally must file a Form 3115, Application for Change in Accounting Method, with the Commissioner during the taxable year in which the taxpayer desires to make the change in method of accounting. Section 1.4461(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures under which taxpayers will be permitted to change their method of accounting. The administrative procedures prescribe those terms and conditions necessary to obtain the Commissioner’s consent to effect the change and to prevent amounts from being duplicated or omitted.

(2) Current guidance on changing methods of accounting . Rev. Proc. 2015

13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 20161, 2016-1 I.R.B. 1, sets forth the general administrative procedures by which a taxpayer may obtain the automatic consent of the Commissioner to change a method of accounting described in the List of Automatic Changes . Rev. Proc. 202523 contains the current List of Automatic Changes .

(3) Changes in method of accounting for research or experimental expenditures under TCJA § 174, § 174, and § 174A .

(a) A change in the treatment of SRE expenditures to comply with TCJA § 174 is a change in method of accounting to which §§ 446(e) and 481, and the corresponding regulations, apply. Similarly, a change in a taxpayer’s treatment of foreign or domestic research or experimental expenditures to comply with § 174 or § 174A, respectively, or to use certain transition options provided in OBBBA § 70302(f), is a change in method of accounting to which §§ 446(e) and 481, and the corresponding regulations, apply.

(b) A taxpayer that changes its method of accounting to comply with TCJA § 174, § 174, or § 174A must use the accounting method change procedures in Rev. Proc. 2015-13 or its successor. (c) Section 3.01 and .02 of this revenue procedure 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 § 174) as follows:

(i) 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 taxable year, the taxpayer’s § 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;

(ii) 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 taxable year beginning after December 31, 2024, the § 481(a) adjustment period for any net positive § 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 § 481(a) adjustment is taken into account either in full in the first taxable year beginning after December 31, 2024, or ratably over the 2-taxable year period beginning with the first taxable year beginning after December 31, 2024);

(iii) To provide that, if a taxpayer previously made a change under section 7.02(2)(f) of Rev. Proc. 2025-23 for a taxable year prior to its year of change for a change under section 7.01 of Rev. Proc. 2025-23, the § 481(a) adjustment period for any net positive § 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

(iv) 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 taxable year beginning before 2028.

(d) Section 3.03 of this revenue procedure 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. 201513 for any change in method of accounting described in section 7.02(3) of Rev. Proc. 2025-23 for any taxable year beginning before 2028.

(e) Section 3.04 and .05 of this revenue procedure 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:

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

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(a) of Rev. Proc. 2025-23 for any taxable year beginning before 2028.

(4) Changes in method of accounting for residential construction contracts under OBBBA .

(a) A change from the percentage-of-completion method described in § 1.460-4(b) or the percentage-of-completion/capitalized-cost method described in § 1.460-4(e) to an exempt contract method described in § 1.460-4(c) for residential construction contracts to comply with § 460(e)(1)(A) is a change in method of accounting to which §§ 446(e) and 481, and the corresponding regulations, apply. Similarly, a change to start or stop capitalizing costs under § 263A for residential construction contracts to comply with § 460(e)(1) is a change in method of accounting to which §§ 446(e) and 481, and the corresponding regulations, apply.

(b) A taxpayer that changes its method of accounting to comply with § 460(e)(1) or to start or stop capitalizing costs under § 263A pursuant to § 460(e)(1) must use the accounting method change procedures in Rev. Proc. 2015-13 (or its successor).

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

(d) Section 4.02 of this revenue procedure 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 taxable 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 § 263A for contracts that do not meet the requirements of § 460(e)(1)(B)(i) and (ii).