IRS Simplifies Method Changes for Research Spending and Homebuilders in Rev. Proc. 2026-32

The IRS on September 4, 2026 released Revenue Procedure 2026-32, updating the automatic procedures companies use to change accounting methods for research spending and for residential construction contracts. The guidance carries out changes made by the 2025 tax law known as the One, Big, Beautiful Bill Act, and it matters most to owners of closely held and pass-through businesses that spend on product development or build homes.

What changed

The 2025 law added Section 174A, which restores an immediate deduction for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024. Foreign research remains subject to amortization under Section 174. Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23, the master list of automatic accounting method changes, as already revised by Rev. Proc. 2025-28.

For research costs, the updated procedures cover taxpayers moving onto the post-2021 amortization rules and onto Section 174A, including companies that used an impermissible method for only one year, according to an analysis by Current Federal Tax Developments. The analysis notes that eligibility restrictions that would normally block a repeat change are waived through tax years beginning before January 1, 2028, and that companies making both transitions at once can spread a resulting positive adjustment rather than absorbing it in a single year.

For builders, the 2025 law amended Section 460(e) for contracts entered into in tax years beginning after July 4, 2025. The revenue procedure revises change 236 so qualifying residential contracts can stop capitalizing costs under Section 263A, and it provides automatic change number 275, which lets eligible taxpayers move residential construction contracts from the percentage-of-completion method to an exempt contract method. These construction changes apply on a cut-off basis, meaning only to contracts entered into on or after the first day of the year of change, with no catch-up adjustment.

Less paperwork, and a filing window

Qualifying construction changes can be made with a reduced Form 3115 limited to the identification and signature sections, Part I, most of Part II, one line of Part IV and Part I of Schedule D. The modified procedures apply to Forms 3115 filed after September 4, 2026, with a transition rule for duplicate copies filed on or before November 15, 2026 under the prior version. A taxpayer that filed a return by September 21, 2026 for a tax year beginning after July 4, 2025, and properly applied the new construction methods on that return, is treated as having complied with the change procedures.

The after-tax math

Separate guidance, Rev. Proc. 2025-28, allowed small business taxpayers to elect to apply Section 174A back to tax years beginning after December 31, 2021. For a tax year beginning in 2025, a small business taxpayer is one with average annual gross receipts of $31 million or less over the prior three years, and that retroactive election had to be made by July 6, 2026.

Example with round numbers: a software company owned through an S corporation spends $2,000,000 on domestic research in 2026. Deducting it immediately under Section 174A reduces 2026 taxable income by $2,000,000. If the owners instead elected to amortize the spending over the 60-month minimum period that Section 174A(c) allows, the first-year deduction would be closer to $400,000, ignoring timing conventions. For owners whose share of income is taxed at 37%, the rate that applies in 2026 to joint filers with taxable income above $768,700, the $1.6 million difference is worth about $592,000 of federal tax in the first year. Over the full period the total deduction is the same; the difference is timing and the cash it frees up.

What to discuss with a CPA

• Whether prior returns used a permissible method for research costs, and which designated change applies now.
• Whether any spending is foreign research that stays on amortization.
• For builders, whether contracts entered into after the 2025 law's effective date qualify for an exempt contract method, and how the gross receipts test affects Section 263A.
• Whether a return already filed qualifies for the September 21 deemed-compliance rule.

What to watch

With the September 21 and November 15 dates close, timing is the practical issue for businesses partway through filing extended 2025 returns. Further procedural guidance on Section 174A may follow as companies work through their first full years under the new deduction.

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