Breaking down the OBBBA: research expenditures guidance update

Last fall, Sikich’s Tax team published an update on the IRS’s research expenditures guidance in Revenue Procedure 2025-28 (Rev Proc 2025-28) related to changes made by the One Big Beautiful Bill Act (OBBBA). The procedure revises the IRS process for changing accounting methods related to research expenditures. Our earlier article addressed how eligible small business taxpayers can retroactively apply the OBBBA’s Section 174A provisions through amended returns. This article focuses on what taxpayers must consider for tax year 2025 and going forward. The major areas we cover are:

• Key accounting method considerations
• Section 163(j) issues 
• Passive investor considerations
• Form 6765 and Schedule G compliance concerns 

Key decisions moving forward

Every taxpayer with research expenditures must determine:

• How to treat pre-1/1/2025 capitalized research expenditures
• How to treat post-12/31/2024 research expenditures

The available methods to make this determination depend on whether the taxpayer made a Small Business Election under Rev Proc 2025-28 and, if so, which section of the procedure they used. Taxpayers may fall into one of the three scenarios below. 

Scenario 1: Small Business Election filed under Section 3 (amended 2022-2024 returns)

In this scenario, the taxpayer amended their 2022, 2023 and 2024 tax returns and filed the Small Business Election to retroactively apply Section 174A (Rev Proc 2025-28 Section 3). The taxpayer must determine how to expense post-12/31/2024 research expenditures on its 2025 tax return:

• Option 1: Elect to deduct research expenditures currently in the year incurred (Section 174A(a)).
  • Option 2: Elect to capitalize and amortize current research expenditures over 60 months (Section 174A(c)).

Both options require an automatic accounting method change, implemented by attaching a Statement in lieu of Form 3115 to the timely filed 2025 tax return (including extensions).

Scenario 2: Small Business Election filed under Section 7.02(5) (change filed on 2024 return)

In this scenario, the taxpayer already filed a change in method of accounting to Section 174A(a) on its 2024 return using a Statement in lieu of Form 3115. All post-12/31/2021 capitalized research expenditures were deducted in 2024. 2024 current-year research expenditures were not capitalized. No additional accounting method change is necessary for 2025.

Scenario 3: No Small Business Election filed

Taxpayers who did not file a retroactive Small Business Election must address both pre-1/1/2025 and post-12/31/2024 research expenditures.

Post-12/31/2024 expenditures: 

The same two options from Scenario 1 apply.

Pre-1/1/2025 capitalized expenditures:

• Option 1: Deduct unamortized domestic pre-1/1/2025 research expenditures in 2025.
• Option 2: Deduct unamortized domestic pre-1/1/2025 research expenditures ratably in the tax years 2025 and 2026. 
• Option 3 (default): Continue amortizing pre-1/1/2025 domestic research expenditures over five years under the prior pre-OBBBA method. 

Option 1 and 2 require an automatic accounting method change via a Statement in lieu of Form 3115.When determining which method(s) to elect, taxpayers must consider how these decisions impact other tax calculations and deductions. 2025 tax return decisions made today impact a business’s tax situation tomorrow. It’s critical for businesses to consult their tax advisors to determine which elections yield the most tax-favorable outcomes.

Section 163(j) issues

Rev Proc 2025-28 also clarifies how accelerated research amortization deductions are treated. Accelerated deductions of unamortized pre-2025 research expenditures (options 1 or 2 under scenario 3) are treated as amortization. This applies when calculating adjusted taxable income (ATI) for the Section 163(j) interest deduction limitation rules. Effects:

• The accelerated deduction is added back to ATI. 
• This applies whether the taxpayer recovers the unamortized amounts over one or two tax years. 
• This generally increases ATI, which is favorable for taxpayers subject to the interest deduction calculation.

Passive investor considerations

Who is passive?

A passive investor is an owner who doesn’t “materially participate” in the business. Generally, an individual is considered to materially participate (be “active”) if they work over 400 hours per year in the business, although other tests under Section 469 may also apply. This passive-versus-active determination is made on the individual’s tax return. It’s not made by the business. An analysis of the Section 469 rules is beyond this article’s scope, but an individual investor should review these rules with a tax advisor.

AMT treatment and the Section 59(e) election

With the return of immediate expensing for research expenditures under Section 174A, the OBBBA also brings back several complications for passive investors in flow-through businesses (S corporations and partnerships/ LLCs) that incur research expenditures. 

For Alternative Minimum Tax (AMT) purposes, passive investors must amortize their research expenditures over ten years, even though those same expenditures can be deducted currently for regular tax purposes. However, active investors can deduct these expenditures currently for both regular tax and AMT. As a result, passive investors may face increased AMT beginning in tax year 2025. Passive investors can make an annual election under Section 59(e) to capitalize and amortize some or all of their current research expenditures for regular tax purposes. This special election may reduce or adjust their AMT exposure but, again, this special election is made at the individual level, not by the business. Different passive owners may make different choices depending on their particular tax situations. Careful consideration and modeling may be necessary to determine the best outcome for individual owners.

Form 6765 and Schedule G compliance concerns: Who must file and when

Taxpayers use IRS Form 6765 to calculate and report the research tax credit under Section 41. This credit is separate from the Section 174A deduction addressed earlier. While the OBBBA mainly changed research expenditure deduction rules – not the research credit – there are important research credit updates.

New Section G requirements beginning in 2026

Form 6765 now includes a new section, Section G: “Business Component Information.” Section G is mandatory for taxpayers claiming the research credit in tax year 2026 (processing year 2027) and onwards. 

The IRS added this section to add transparency and improve risk assessment. It requires taxpayers to report qualified research expenses (QREs) by business component rather than in total. This aligns with Section 41, which ties the credit requirement to specific business component activities.

Who files Section G?

Beginning in tax years 2026 and after, Section G is mandatory for all filers except qualified small business (QSB) taxpayers. QSBs are not required to complete Section G if they meet one of the following criteria:

• They elected the reduced payroll tax credit.
• They have:
  • QREs of $1.5 million or less
  • Gross receipts of $50 million or less
  • Claimed the research credit on an originally filed return

What taxpayers should track for Form 6765

Taxpayers must track QREs by research project on Form 6765, including: 

• Wage type and amount
• Supply costs
• Computer costs
• Contract research expenses 

These new and complex processes often warrant in-depth tax planning and analysis. Our team of experts are available to explain how these new OBBBA rules changes with research expenditures, and the recent reporting changes with the research credit impact your business.

About our authors

Phil Rosloniec, CPA, supports the tax planning and strategies of business owners in industries such as construction, professional services and engineering. With nearly two decades of experience in public accounting and at publicly traded companies, he brings a deep understanding of tax laws and compliance.

Brian Forsberg, CPA, has been working in business taxation services since 2013, advising closely held businesses across wide-ranging industries, including technology, professional services, manufacturing, and retail. He specializes in C corporation taxation, income tax accounting, and multistate tax matters. Brian takes pride in developing a deep understanding of each client’s complete business operations. He can then clearly explain the tax implications of strategic decisions and identify practical solutions that align business objectives with an effective and sustainable tax strategy.

Jenny Kramer, CPA, has been helping closely held businesses and their owners with their tax planning and compliance needs since 2005. She specializes in taking the time to understand her clients’ overall business strategies so that she can provide a clear understanding of the tax implications of their goals and develop tax planning opportunities that will coincide with and enhance their objectives.

Jerry Murphy, CPA, CMA, CGMA, has more than 30 years of experience and is the leader of Sikich’s Manufacturing and Distribution Services team. He specializes in assurance services and provides business advisory solutions in areas such as operations improvement, strategic planning, and mergers and acquisitions.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.