Rev. Proc. 2026-32 provides flexibility for treatment of R&D costs and long-term construction contracts post-OBBBA

Background

Rev. Proc. 2026-32 provides procedures for obtaining automatic consent to change methods of accounting to comply with Sections 174, 174A, and 460(e). The updates are intended to align Rev. Proc. 2025-23, the list of automatic accounting method changes, with statutory changes enacted by OBBBA. 

Rev. Proc. 2026-32 was necessary because OBBBA made significant statutory changes to the treatment of domestic R&E expenditures and residential construction contracts, but taxpayers needed procedural rules to implement those changes in practice. Previously-released procedural guidance failed to address accounting method changes for these items in current tax years. In particular, taxpayers required guidance on how to make available elections, file or avoid filing Forms 3115, apply automatic accounting method change procedures, and coordinate transition relief for previously capitalized amounts.

For R&E expenditures, OBBBA restored immediate expensing for domestic R&E expenditures beginning in 2025, costs which had been subject to capitalization as part of the Tax Cuts and Jobs Act, while retaining capitalization and 15-year amortization for foreign R&E expenditures. OBBBA also allowed taxpayers to recover remaining unamortized domestic R&E expenditures from prior years either in the first taxable year beginning after December 31, 2024, or ratably over two taxable years. These statutory changes created timing, election, and method-change questions that required administrative guidance.

Similarly, OBBBA amended Section 460(e) to expand the circumstances in which residential construction contracts may qualify for exempt contract treatment. Taxpayers therefore needed updated procedures to determine when they could change from percentage-of-completion accounting to an exempt contract method and when a related change to capitalize costs under Section 263A would be required.

R&E Expenditures

Rev. Proc. 2026-32 revises the automatic method change procedures for both domestic and foreign R&E expenditures. For domestic R&E expenditures, the revenue procedure coordinates the Section 481(a) adjustment rules with the OB3 transition provisions for previously capitalized costs. It also extends relief from the five-year eligibility rule for accounting method changes to domestic and foreign R&E expenditures through tax years beginning before January 1, 2028. Lastly, the guidance removes the prior limitation that restricted automatic changes for foreign R&E expenditures to tax years beginning before January 1, 2026.

While coordinating the Section 481(a) adjustment period for Section 174A changes with the recovery of unamortized amount method adjustment period will streamline accounting for such changes, the waiver of the five-year eligibility rule is significant because Rev. Proc. 2015-13 generally prevents a taxpayer from using the automatic change procedures for an item if the taxpayer made or requested a change for the same item during any of the five taxable years ending with the year of change. Without the extension of the waiver, taxpayers that recently changed their treatment of Section 174 costs—such as in response to the TCJA capitalization rules—could have been barred from using the automatic procedures to implement the OB3 changes.

By waiving that restriction through tax years beginning before January 1, 2028, the revenue procedure provides practical transition relief to taxpayers seeking to make the required or available accounting method changes without obtaining non-automatic or advance consent. That relief is important because the non-automatic process can be more time-consuming, costly, and uncertain, particularly for taxpayers that must coordinate current-year expensing, recovery of previously capitalized domestic R&E expenditures, and related Section 481(a) adjustments. By preserving access to the automatic consent process, the revenue procedure allows taxpayers to update their methods more quickly and consistently, while reducing the administrative burden, cost, and uncertainty associated with nonautomatic method change requests.

Examples of the Waiver’s Impact

The following examples illustrate why the waiver is meaningful in practice:

• Taxpayer with a prior TCJA Section 174 change. A calendar-year taxpayer filed a Form 3115 for its 2022 tax year to change its method of accounting for domestic R&E expenditures from currently deducting those costs to capitalizing and amortizing them under TCJA Section 174. After OB3 restores current expensing for domestic R&E expenditures beginning in 2025, the taxpayer needs to change its method again. Without the waiver, the taxpayer’s 2022 Section 174 method change could prevent it from using the automatic procedures for the 2025 change because the same item was changed within the five-year period. With the waiver, the taxpayer may use the automatic procedures to implement the OB3 change.
• Taxpayer refining its Section 174 approach during the transition period. A taxpayer initially filed an automatic method change to comply with the TCJA capitalization rules but later determines, in light of updated guidance and the OBBBA transition provisions, that it should adjust how it identifies and recovers previously capitalized domestic R&E expenditures. The five-year rule could otherwise force the taxpayer into the non-automatic process even though the additional change is part of adapting to successive statutory and administrative changes. The waiver may permit the taxpayer to make the follow-on change automatically, provided the change is within the revenue procedure’s scope and otherwise satisfies its terms, reducing cost and delay.
• Taxpayer coordinating current expensing with recovery of unamortized amounts. A taxpayer has remaining unamortized domestic R&E expenditures from 2022 through 2024 and elects to recover those amounts over the transition period while also changing to current expensing for post-2024 domestic R&E costs. If the taxpayer had made a prior Section 174 method change, the five-year rule could complicate or delay the integrated method change needed to coordinate those items. The waiver allows the taxpayer to align the Section 481(a) adjustment, recovery of unamortized amounts, and current-year expensing within the automatic consent framework.

Thus, Rev. Proc. 2026-32 may permit a taxpayer that has already filed an R&E method change to make a subsequent automatic method change, but only when the additional change is within the scope of the revenue procedure and otherwise satisfies its terms. Ordinarily, the five-year rule would prevent a taxpayer from using the automatic change procedures if it already made or requested a change for the same item during the five taxable years ending with the year of change. That could present a limitation for taxpayers that already filed a method change to comply with OBBBA or earlier Section 174 guidance and subsequently seek to make another conforming or corrective change under the new revenue procedure.

Because the revenue procedure waives that restriction for tax years beginning before January 1, 2028, a prior method change generally would not, by itself, bar the taxpayer from making another automatic method change covered by the revenue procedure. As a practical matter, this means a taxpayer may have an additional opportunity to align its accounting method with the new procedural framework—such as coordinating current domestic R&E expensing, recovery of unamortized domestic R&E amounts, and the related Section 481(a) adjustment—even if it already made a prior Section 174 method change. It will still be important for a taxpayer to confirm several items though to avail themselves of this waiver:

• Scope — the new change must be one described in the revenue procedure.
• Timing — the change must fall within the years for which the eligibility-rule waiver applies.
• Same item analysis — the taxpayer should identify whether the earlier and later changes involve the same item and whether the waiver covers the relevant eligibility restriction.
• Section 481(a) coordination — the taxpayer must apply the revenue procedure’s rules for any positive or negative adjustment, including any required coordination with recovery of unamortized domestic R&E amounts.
• Transition rules — if the taxpayer already filed a Form 3115 or has a pending non-automatic request, the specific transition procedures matter.

Residential Construction Contracts

Before OBBBA, Section 460 generally required long-term construction contracts to use the percentage-of-completion method (PCM), under which income is recognized as work progresses. Section 460(e) provides special exception rules that exempt certain residential and small construction contracts from the mandatory use of PCM, allowing eligible contractors to use a less-burdensome exempt contract method, such as the completed-contract method or cash method where otherwise available. The prior principal residence exception was limited to “home construction contracts,” which generally covered smaller projects involving buildings with four or fewer dwelling units. As a result, larger residential developments—such as apartment buildings, condominium projects, and other multifamily housing—often remained subject to PCM even though they shared many of the same business and cash-flow characteristics as smaller home construction projects.

OBBBA changed that treatment by expanding the Section 460(e) exception from home construction contracts to broader residential construction contracts. The change effectively removes the prior four-unit limitation and allows more residential projects to qualify for exempt contract treatment, including use of the completed-contract method where otherwise available. The change does not, however, mean that every multifamily or residential project automatically qualifies; the contract must satisfy the applicable statutory requirements and the terms of the revenue procedure. The change applies to contracts entered into in tax years beginning after July 4, 2025.

The tax treatment was changed to align the Section 460 rules more closely with the economics of modern residential development. Larger multifamily projects can involve long construction periods, significant up-front costs, and delayed cash receipts, much like traditional home construction projects. Allowing qualifying residential contracts to avoid mandatory PCM accounting can defer income recognition until the contract is substantially complete, improving cash-flow matching and reducing the administrative complexity associated with tracking percentage completion for these projects.

Rev. Proc. 2026-32 was therefore needed to translate the statutory change into administrable accounting method change procedures. Taxpayers required guidance on when they may move from PCM to an exempt contract method for qualifying residential construction contracts, and when a related change to capitalize costs under Section 263A is required.

The revenue procedure also updates the accounting method change procedures for residential construction contracts to reflect the OB3 amendments to Section 460(e). It expands existing procedures that allow certain taxpayers to stop capitalizing costs under Section 263A. In addition, it creates a new automatic method change for residential construction contracts entered into in tax years beginning after July 4, 2025. Under that change, eligible taxpayers may move from PCM to an exempt contract method or, where required, begin capitalizing costs under Section 263A.

Conclusion

Following OBBBA’s changes to the treatment of R&E expenditures and residential construction contracts, procedural accounting method change guidance was needed to enable taxpayers to utilize the new statutory provisions. With Rev. Proc. 2026-32, Treasury and the IRS have provided a targeted modification to Rev. Proc. 2025-23 to coordinate Section 481(a) adjustments for Section 174A changes related to domestic R&E expenditures with the recovery of unamortized amount method adjustment period (either 1 or 2 years), extend the waiver of the five-year eligibility rule for certain accounting method changes related to domestic and foreign R&E expenditures through taxable years beginning before 2028, and provide new automatic accounting method changes for certain residential construction contracts to change to an exempt contract method, where eligible, to take into account OBBBA’s changes to Section 460(e). The modified procedures generally apply to Forms 3115 filed after September 4, 2026, but taxpayers should also consider specific transition rules, including potential conversion of certain pending non-automatic requests and the ability, in some circumstances, to continue relying on prior procedures for duplicate Forms 3115 filed on or before November 15, 2026. Taxpayers with R&E expenditures and/or residential construction contracts should review the terms and conditions of the revenue procedure to evaluate whether this new taxpayer-favorable, flexible guidance may improve or strengthen their current treatment of such costs. For a quick summary of what Rev. Proc. 2026-32 changed, please review the table below.

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