IRS expands automatic method changes for R&E and residential construction.

On September 4, 2026, the IRS released Rev. Proc. 2026-32, which was published in Internal Revenue Bulletin 2026-39 on September 21, 2026. The revenue procedure modifies sections 7 and 19 of Rev. Proc. 2025-23, which contains the current List of Automatic Changes, to expand the automatic consent procedures for changes in method of accounting for research or experimental (R&E) expenditures under IRC §§174 and 174A and for residential construction contracts under IRC §460(e), as amended by the One Big Beautiful Bill Act (OBBBA).

Rev. Proc. 2026-32 extends to taxable years beginning before January 1, 2028 the waiver of two eligibility rules that would otherwise bar certain R&E method changes from the automatic procedures. It coordinates the §481(a) adjustment for taxpayers correcting their treatment of domestic R&E expenditures for 2022 through 2024 with the OBBBA transition rule for recovering unamortized amounts, and removes a limitation that confined automatic changes to conform the treatment of foreign R&E expenditures to §174, as amended by the OBBBA, to taxable years beginning before 2026. It also adds a new automatic change for residential construction contracts entered into in taxable years beginning after July 4, 2025. The modified procedures are generally effective for Forms 3115 filed after September 4, 2026.

IRB 2026-39 also contains, among other items, final regulations on the deduction for qualified passenger vehicle loan interest and related information reporting (T.D. 10054) and proposed regulations on a U.S. shareholder’s pro rata share of subpart F income, tested income, or tested loss (REG-115646-25). Those items are outside the scope of this discussion.

Background

For amounts paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, IRC §174, as amended by the Tax Cuts and Jobs Act (TCJA), required taxpayers to capitalize specified research or experimental (SRE) expenditures and amortize them over five years for domestic research or 15 years for foreign research, beginning with the midpoint of the taxable year in which the expenditures were paid or incurred.

The OBBBA added IRC §174A, which allows a deduction for domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, or, at the taxpayer’s election, amortization over a period of not less than 60 months. Foreign R&E expenditures remain subject to 15-year amortization under §174. Section 70302(f) of the OBBBA provides two transition rules for domestic expenditures capitalized under the TCJA. Any taxpayer may elect to deduct the remaining unamortized amount in full in its first taxable year beginning after December 31, 2024, or ratably over the two-taxable-year period beginning with that year (the recovery of unamortized amount method). Small business taxpayers meeting the §448(c) gross receipts test for that year ($31 million for taxable years beginning in 2025) could instead elect to apply §174A retroactively to taxable years beginning after December 31, 2021. That election generally had to be made by July 6, 2026 (see RSK’s overview of the OBBBA).

Rev. Proc. 2025-28, released August 28, 2025, provided procedures for these elections and rewrote section 7 of Rev. Proc. 2025-23, which now contains three automatic changes, each identified by a designated automatic accounting method change number (DCN). Rev. Proc. 2025-28 narrowed the existing DCN 265 to domestic SRE expenditures under the TCJA version of §174 and added DCN 273, for changes to a §174A method and to the OBBBA transition methods, and DCN 274, for foreign R&E expenditures.

Separately, OBBBA §70430 amended §460(e) to exempt all residential construction contracts from the percentage-of-completion method (PCM), without regard to the taxpayer’s gross receipts, and eliminated the percentage-of-completion/capitalized-cost method (PCCM) for residential construction contracts. Before the amendment, residential construction contracts that were not home construction contracts could be accounted for under the PCCM, 70 percent under the PCM and 30 percent under an exempt contract method. The amendments apply to contracts entered into in taxable years beginning after July 4, 2025.

Extended Eligibility Relief for R&E Method Changes

Under section 5.01(1) of Rev. Proc. 2015-13, a taxpayer generally may not use the automatic change procedures if the year of change is the final year of the trade or business (section 5.01(1)(d)), or if the taxpayer has made or requested a change for the same item during any of the five taxable years ending with the year of change (section 5.01(1)(f)). Rev. Proc. 2025-28 waived these rules, in whole or in part, for R&E method changes made for certain taxable years beginning before 2026.

Rev. Proc. 2026-32 waives both eligibility rules for changes under DCNs 265, 273, and 274 made for any taxable year beginning before January 1, 2028. It also permits a taxpayer to make a change under DCN 265 or DCN 274 where the taxpayer has used the impermissible method for only one taxable year (that is, only in the taxable year immediately preceding the year of change).

In addition, Rev. Proc. 2026-32 removes the limitation that confined DCN 274 changes to comply with §174, as amended by the OBBBA, to taxable years beginning before January 1, 2026. Taxpayers may therefore use the automatic procedures to conform their treatment of foreign R&E expenditures for 2026 and later taxable years. Rev. Proc. 2026-32 does not, however, modify the applicability provisions of section 7.02(3) of Rev. Proc. 2025-23. Each DCN 273 change therefore remains limited to taxable years beginning before January 1, 2026, which in practice is generally the first taxable year beginning after December 31, 2024, and the principal effect of the extended waiver for DCN 273 is to waive the five-year rule in full for those years. For later taxable years, a taxpayer may still elect §174A(c) amortization for the current year’s domestic R&E expenditures by statement attached to its timely filed original return under section 6.02 of Rev. Proc. 2025-28.

Coordination of the §481(a) Adjustment with the Recovery of Unamortized Amount Method

DCN 265 permits a taxpayer that did not capitalize domestic SRE expenditures, or did not capitalize the correct amount, for taxable years beginning in 2022 through 2024 to change to a method that complies with the TCJA version of §174. The change is made with a modified §481(a) adjustment that takes into account only expenditures paid or incurred in those years. If the modified adjustment is negative, the taxpayer may instead implement the change on a cut-off basis.

Rev. Proc. 2026-32 coordinates this change with the recovery of unamortized amount method. Where a taxpayer adopted that method for a prior taxable year, the §481(a) adjustment for the DCN 265 change must reflect its application. The period over which a net positive adjustment is taken into account depends on whether, and when, the recovery method was adopted:

Circumstance	Period for a net positive §481(a) adjustment under DCN 265
DCN 265 change and change to the recovery of unamortized amount method both made for the first taxable year beginning after December 31, 2024	The same period elected under the recovery method: in full in that year, or ratably over the two-taxable-year period beginning with that year
Recovery of unamortized amount method adopted for a prior taxable year	The amortization period remaining under the recovery method
Recovery of unamortized amount method not adopted	Not addressed by Rev. Proc. 2026-32; under the general rules of Rev. Proc. 2015-13, a positive adjustment is generally taken into account ratably over four taxable years

The coordination rule departs from the general four-year spread. It aligns the income resulting from the correction with the accelerated deduction of unamortized amounts under the recovery method, so that the two generally fall in the same taxable years.

Automatic Changes for Residential Construction Contracts

Under §460(e)(4) and Treas. Reg. §1.460-3(b)(2), a home construction contract is a construction contract for which the taxpayer reasonably expects 80 percent or more of estimated total contract costs to be attributable to the building, construction, reconstruction, or rehabilitation of dwelling units in buildings containing four or fewer units, and related improvements on the site. A dwelling unit has the meaning given in §168(e)(2)(A)(ii)(I), which excludes units in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis. A residential construction contract is a contract that would be a home construction contract but for the four-unit limitation, and therefore generally includes apartment and condominium projects.

For residential construction contracts entered into in taxable years beginning after July 4, 2025, which for calendar-year taxpayers means contracts entered into on or after January 1, 2026, taxpayers are no longer required to use the PCM and may use an exempt contract method under Treas. Reg. §1.460-4(c), such as the completed contract method. Under §460(e)(1), §263A applies to those contracts unless the taxpayer meets the §448(c) gross receipts test for the year the contract is entered into ($32 million for taxable years beginning in 2026) and estimates that the contract will be completed within two years of the contract commencement date, or three years for a residential construction contract that is not a home construction contract. A taxpayer that meets the §448(c) test for a taxable year is also generally exempt from §263A for that year under §263A(i), so the capitalization requirement principally affects taxpayers above the threshold. The OBBBA made a conforming change to §56(a)(3), so residential construction contracts are also excepted from the PCM for alternative minimum tax purposes, which is relevant principally to individual owners of pass-through contractors.

Rev. Proc. 2026-32 provides the following automatic changes for these contracts:

DCN	Rev. Proc. 2025-23	Change
275 (new)	Section 19.03	For residential construction contracts entered into in taxable years beginning after July 4, 2025, a change from the PCM or the PCCM to an exempt contract method, or a change to begin capitalizing costs under §263A for contracts that do not meet the gross receipts and completion period requirements
236 (modified)	Section 19.01	Adds a change to stop capitalizing costs under §263A for residential construction contracts entered into in taxable years beginning after July 4, 2025, that meet the gross receipts and completion period requirements

Both changes are made on a cut-off basis and apply only to contracts entered into on or after the first day of the year of change, so no §481(a) adjustment is permitted or required. Contracts entered into in earlier years continue under the taxpayer’s existing method. The taxpayer completes only specified portions of Form 3115. The final-year and five-year eligibility rules do not apply to a DCN 275 change, or to the new DCN 236 change for residential construction contracts, for the taxpayer’s first or second taxable year beginning after July 4, 2025.

DCN 275 does not apply for the first taxable year in which a taxpayer enters into any residential construction contract, such as a new builder’s first year. The adoption of an exempt contract method in that year is not a change in method of accounting and does not require a Form 3115. A contractor that already accounts for residential construction contracts under the PCM or the PCCM must file Form 3115 to change its method for new contracts. In addition, a taxpayer that filed a return on or before September 21, 2026, for a taxable year beginning after July 4, 2025, and properly applied a method described in DCN 275 for that year, is deemed to have complied with the method change procedures.

Effective Date and Transition Rules

The modified procedures are generally effective for Forms 3115 filed after September 4, 2026. Rev. Proc. 2026-32 also provides the following transition rules:

• Duplicate copies filed on or before November 15, 2026. A Form 3115 for a change under section 7 or 19.01 of Rev. Proc. 2025-23, as in effect before Rev. Proc. 2026-32, is not subject to the new effective date if the taxpayer files the duplicate copy on or before November 15, 2026. If the change remains eligible under the modified procedures and the taxpayer has not yet filed its original return for the year of change, it may implement the change under either the prior or the modified procedures, but not both. A taxpayer choosing the modified procedures must resubmit a signed duplicate copy to the IRS in Ogden, Utah, bearing the statement “FILED UNDER REV. PROC. 2026-32, AS PROVIDED IN SECTION 6.02(2)(b) OF REV. PROC. 2026-32” at the top of page 1.
• Pending non-automatic requests. A taxpayer with a non-automatic Form 3115 filed before, and pending with the national office on, September 21, 2026, for a change now covered by the automatic procedures may convert the request by notifying the national office before the later of October 21, 2026, or the issuance of a letter ruling. The IRS will return the user fee. The taxpayer must resubmit a conforming Form 3115 by the earlier of 30 calendar days after the date of the IRS acknowledgment letter or the date the duplicate copy is otherwise due.

Quick answers

RSK Insight

The extension of the five-year eligibility waiver is likely the most broadly applicable relief in Rev. Proc. 2026-32. Taxpayers that did not capitalize domestic SRE expenditures for 2022 through 2024, or capitalized an incorrect amount, may correct that treatment under the automatic procedures for a taxable year beginning before 2028, including where a prior §174 method change would otherwise have required a non-automatic request and user fee. Taxpayers making the correction for their first taxable year beginning after December 31, 2024 should consider making it together with a change to the recovery of unamortized amount method, so that the resulting §481(a) adjustment is taken into account over the same period as the related recovery deductions. Calendar-year C corporations and individuals that have not yet filed their 2025 returns, which are due on extension by October 15, 2026, should evaluate these changes before filing, because the change to the recovery of unamortized amount method is made by statement with the timely filed original return for that year.

For residential builders and developers, the availability of the completed contract method for apartment and condominium contracts may defer a significant amount of income compared with the PCCM. Taxpayers above the §448(c) threshold must, however, capitalize costs to those contracts under §263A, and the 80 percent cost test should be confirmed for mixed-use projects, particularly those with hotel or other transient lodging components. Section 460 applies only to construction performed under a contract, so a developer constructing apartments for its own account to hold as rental property does not have a long-term contract. Because the change applies on a cut-off basis, contractors will account for existing and new contracts under different methods for a period of time and should consider the effect on financial reporting, ASC 740 deferred taxes, and state tax filings. For Texas franchise tax purposes, the Comptroller now generally determines amounts taken from the federal return under the federal law in effect for the federal tax year, so the effect of a federal method change on total revenue should be evaluated. That policy is administrative and subject to change (see RSK’s analysis of the Comptroller’s current IRC conformity policy).

How RSK Can Help

• R&E method review. Evaluate prior §174 treatment for 2022 through 2024 and determine whether a correcting change under DCN 265 is available and advisable.
• Form 3115 preparation. Prepare automatic change requests and statements, including §481(a) computations and coordination with the recovery of unamortized amount method.
• Residential contract analysis. Identify residential construction contracts under §460(e), including mixed-use projects, and model the effect of changing from the PCM or PCCM to an exempt contract method.
• Section 263A capitalization. Assess whether the gross receipts and completion period requirements are met and develop capitalization methodologies where they are not.
• Tax provision support. Evaluate the ASC 740 effect of accounting method changes on current and deferred taxes.

Please visit RSK’s Tax Advisory page or contact us for more information on how RSK can help.

References

1. Internal Revenue Bulletin 2026-39 (Sept. 21, 2026), including Rev. Proc. 2026-32 at page 406. irs.gov
2. Rev. Proc. 2026-32 (released Sept. 4, 2026). irs.gov
3. Rev. Proc. 2025-28, 2025-38 I.R.B. 393 (elections and automatic changes under §§174 and 174A). irs.gov
4. Rev. Proc. 2025-23, 2025-24 I.R.B. 1476 (List of Automatic Changes). irs.gov
5. Rev. Proc. 2015-13, 2015-5 I.R.B. 419 (general procedures for changes in method of accounting). irs.gov
6. IRC §§174 and 174A, research or experimental expenditures. 26 U.S.C. §174 · 26 U.S.C. §174A
7. IRC §460(e), exception for certain construction contracts, and §56(a)(3). 26 U.S.C. §460 · 26 U.S.C. §56
8. Treas. Reg. §§1.460-3 and 1.460-4, construction contracts and methods of accounting for long-term contracts. 26 C.F.R. §1.460-3 · 26 C.F.R. §1.460-4
9. IRC §263A(i), exemption for certain small businesses. 26 U.S.C. §263A
10. Pub. L. 119-21, §§70302 and 70430 (One Big Beautiful Bill Act). govinfo.gov
11. Rev. Proc. 2024-40 and Rev. Proc. 2025-32 (2025 and 2026 inflation adjustments, including the §448(c) gross receipts test). Rev. Proc. 2024-40 · Rev. Proc. 2025-32

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This article is for general informational purposes only and does not constitute tax advice. It reflects guidance available as of September 30, 2026. Eligibility for the automatic change procedures depends on the requirements of Rev. Proc. 2015-13 and the applicable sections of Rev. Proc. 2025-23, as modified, and on each taxpayer’s specific facts. Readers should consult a qualified advisor before taking action.

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