OBBBA method change under IRS Rev. Proc. 2026-32?
On September 4, 2026, the IRS released Rev. Proc. 2026-32, the operative revenue procedure that finally lets taxpayers move onto the post-One, Big, Beautiful Bill Act treatment of research or experimental expenditures and residential construction contracts under the automatic-consent procedures rather than by letter ruling. For anyone who has been holding a draft Form 3115 since July 4, 2025, this is the missing piece. The OBBBA method change is now on the automatic list, the eligibility bars in Rev. Proc. 2015-13 are waived through 2027 for the covered changes, and there is a compressed window in November for returns already filed.
Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 and coordinates with Rev. Proc. 2025-28, the August 2025 procedure that first established the § 174A election mechanics. Nothing about the substantive OBBBA rules changed here; what changed is the plumbing. That plumbing decides whether a return can be filed under the correct method this fall and whether the taxpayer has to pay a user fee to do it.
What is the OBBBA method change under Rev. Proc. 2026-32? 🧾
It is the IRS automatic-consent procedure for the research-expenditure and residential-construction accounting changes required or allowed by the OBBBA, published in Rev. Proc. 2026-32 as modifications to sections 7 and 19 of Rev. Proc. 2025-23.
The One, Big, Beautiful Bill Act rewrote two accounting-method battlefields in the summer of 2025. First, § 70302 of the Act amended IRC § 174 so that § 174 now applies only to foreign research or experimental expenditures (still capitalized and amortized over 15 years) and added § 174A, which allows a current deduction for domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024. A taxpayer can still elect to capitalize domestic amounts and amortize them ratably over a period of not less than 60 months. Second, § 70430 amended IRC § 460 to extend the home-construction-contract exception under § 460(e)(1)(A) to all residential construction contracts entered into in taxable years beginning after July 4, 2025, and repealed the old percentage-of-completion / capitalized-cost method for those residential contracts.
Rev. Proc. 2026-32 is what turns those substantive rules into filings a preparer can actually make. It modifies section 7.01, 7.02, and 7.03 of Rev. Proc. 2025-23 for the research changes, modifies section 19.01 and adds section 19.03 for the construction changes, and pins the effective date and the transition windows. Every change described is still a change in method of accounting under § 446(e) and IRC § 481, which means Form 3115 and § 481(a) adjustments have not disappeared. What has changed is that the changes are on the automatic list, the eligibility bars in section 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply for the covered years, and several new changes qualify for a reduced-content Form 3115.
How does the OBBBA method change work for § 174 and § 174A R&E costs? 🔬
For domestic amounts you move onto § 174A (current deduction, or 60-month capitalization by election) under modified section 7.01 or 7.02 of Rev. Proc. 2025-23; for foreign amounts you stay on § 174 (15-year amortization) under modified section 7.03. The eligibility waiver runs through any taxable year beginning before January 1, 2028, and a taxpayer that already changed to the recovery-of-unamortized-amount method has explicit coordination rules for the current-year § 481(a) adjustment.
Rev. Proc. 2026-32 does four practical things for the research changes. It extends the eligibility waiver in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 for changes under sections 7.01(1)(a), 7.02(3), and 7.03(1)(a) of Rev. Proc. 2025-23 to any taxable year beginning before January 1, 2028. It removes the earlier limitation that a foreign-research change under § 174 was only available for taxable years beginning before January 1, 2026. It writes explicit coordination language into section 7.01(3)(a) of Rev. Proc. 2025-23 so a taxpayer that has already elected the recovery-of-unamortized-amount method under section 7.02(2)(f) knows how the current-year § 481(a) adjustment interacts. And it clarifies that a negative modified § 481(a) adjustment can be implemented on a cut-off basis if the taxpayer chooses.
The § 481(a) mechanics matter because most R&E balance sheets carry unamortized amounts from the 2022–2024 capitalization years that OBBBA now touches. Section 7.01(3)(a)(iii) of Rev. Proc. 2025-23, as modified, addresses two common patterns: a concurrent change to the recovery-of-unamortized-amount method with the current-year change, and a change made in a year after the recovery election. In both cases the net positive § 481(a) adjustment period follows the amortization period elected under the recovery method rather than the default four-year spread. That single alignment eliminates the mismatch that would otherwise leave a taxpayer accelerating income under the § 481(a) adjustment while deferring it under the recovery method.
From our practice: the automatic list is not a shortcut past the arithmetic
In our practice, most of the value here is not the automatic list itself, which we already expected, but the November 15, 2026 duplicate-copy window and the section 7.01(3)(a)(iii) coordination language. Clients who filed a Rev. Proc. 2025-23 duplicate copy earlier in 2026 now have a real choice between the pre- and post-modification rules. That choice is almost always worth modeling before the original return is filed, especially for R&E-heavy companies with large unamortized SRE balances.
What did Rev. Proc. 2026-32 change for § 460(e) residential construction contracts? 🏗️
It modifies section 19.01 of Rev. Proc. 2025-23 to let the small-taxpayer exception cover residential contracts under the OBBBA rules (automatic change 236) and adds a new section 19.03 that authorizes an automatic change for residential construction contracts entered into in taxable years beginning after July 4, 2025 (automatic change 275). Both changes are made on a cut-off basis with a reduced Form 3115.
Under OBBBA § 70430(a)(1)(A), the home-construction-contract exception in § 460(e)(1)(A) was extended to all residential construction contracts, so the percentage-of-completion requirement no longer applies to them by default. OBBBA § 70430(a)(2) removed § 460(e)(4), eliminating the old percentage-of-completion / capitalized-cost method for residential contracts. Rev. Proc. 2026-32 turns those substantive changes into two automatic procedures:
| Rev. Proc. 2025-23 section | Automatic change number | What it covers |
|---|---|---|
| Section 19.01 (modified) | 236 | The small-taxpayer exception from § 460, including a change to stop capitalizing costs under § 263A for residential construction contracts that meet § 460(e)(1)(B)(i) and (ii). Reduced Form 3115. Eligibility waiver applies to the first or second taxable year beginning after July 4, 2025. |
| Section 19.03 (new) | 275 | Residential construction contracts entered into in taxable years beginning after July 4, 2025: change from percentage-of-completion (or the repealed percentage-of-completion / capitalized-cost method) to an exempt contract method, or start capitalizing under § 263A for contracts that do not meet the small-taxpayer test. Cut-off basis, no § 481(a) adjustment permitted. Reduced Form 3115. |
The reduced Form 3115 in both changes limits the required content to the page 1 identification and signature blocks, Part I, Part II (all lines except line 16), Part IV line 25, and Schedule D Part I. That is meaningfully shorter than the full Form 3115 preparation cycle. It does not, however, remove the duplicate-copy and original-return filing requirements of section 6.03 of Rev. Proc. 2015-13.
The deemed-compliance rule in section 19.03(5) is the practical bridge for early filers. If a taxpayer filed a Federal income tax return for a taxable year beginning after July 4, 2025 on or before September 21, 2026 and properly applied the section 19.03(1)(a) or (b) methods, the taxpayer is deemed to have complied with the general procedures under § 446(e), § 1.446-1(e), and section 19.03. That covers the fiscal-year taxpayer who could not wait for Rev. Proc. 2026-32 to be released before filing.
What transition and conversion windows do you need on the calendar? 📅
Three dates. Rev. Proc. 2026-32 is effective for a Form 3115 filed after September 4, 2026. A duplicate copy filed on or before November 15, 2026 for a change described in section 7 or 19.01 (pre-modification) can elect either set of rules. A non-automatic Form 3115 filed before September 21, 2026 and still pending can be converted to the automatic procedures if the taxpayer notifies the IRS national office before the later of October 21, 2026 or a letter ruling.
- September 4, 2026 — effective date. Sections 7, 19.01, and 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, are effective for a Form 3115 filed after this date. A Form 3115 filed on or before September 4, 2026 is governed by the prior-version procedures.
- September 21, 2026 — deemed-compliance and conversion gate. For § 460(e) residential construction contracts, an already-filed return that properly applied the section 19.03 methods by this date is deemed to have complied with the automatic-consent procedures. Separately, a non-automatic Form 3115 for a covered change filed under Rev. Proc. 2015-13 before this date can be converted to the automatic procedures if the pending letter ruling has not been issued.
- October 21, 2026 — conversion notice deadline (default). A taxpayer converting a non-automatic Form 3115 must notify the IRS national office by the later of this date or the issuance of a letter ruling granting or denying consent. The national office returns the user fee once conversion is acknowledged.
- November 15, 2026 — duplicate-copy window. A taxpayer that properly files the duplicate copy of Form 3115 on or before this date for a change described in section 7 or 19.01 (pre-modification) may choose either the pre- or post-modification version of Rev. Proc. 2025-23 for that change, but not both. Choosing the modified version requires resubmitting a signed duplicate copy stamped “FILED UNDER REV. PROC. 2026-32, AS PROVIDED IN SECTION 6.02(2)(b) OF REV. PROC. 2026-32” on the top of page 1.
The eligibility waiver is not indefinite
The waiver of the section 5.01(1)(d) and (f) eligibility rules of Rev. Proc. 2015-13 does not run forever. For the § 174 and § 174A changes under sections 7.01, 7.02, and 7.03 of Rev. Proc. 2025-23, it applies to any taxable year beginning before January 1, 2028. For the § 460(e) changes under sections 19.01 and 19.03, it applies only to the taxpayer’s first or second taxable year beginning after July 4, 2025. Miss the window and the ordinary five-year prior-change bar in section 5.01(1)(f) returns.
Who actually needs to file under Rev. Proc. 2026-32? 🧮
Any taxpayer that must or elects to change its method of accounting for research or experimental expenditures under § 174 or § 174A after OBBBA, and any taxpayer with residential construction contracts entered into in taxable years beginning after July 4, 2025 that is changing its § 460(e) or § 263A treatment. That covers most closely held businesses with in-house R&D and most residential developers under the small-taxpayer threshold.
- Domestic R&E filers under § 174A. Any taxpayer changing to the current-deduction method or making a 60-month capitalization election for domestic research or experimental expenditures for a taxable year beginning after December 31, 2024 uses modified section 7.02 (with the section 6 election mechanics from Rev. Proc. 2025-28 for § 174A(c) elections).
- Foreign R&E filers under § 174. Any taxpayer changing its method for foreign research or experimental expenditures to comply with TCJA § 174 (pre-January 2025), rely on Notice 2023-63 interim guidance, or comply with the OBBBA amendments (post-2024) uses modified section 7.03. The prior January 1, 2026 sunset on this change is removed.
- Residential developers under § 460(e). Contractors moving away from the percentage-of-completion or repealed percentage-of-completion / capitalized-cost method for residential contracts entered into in taxable years beginning after July 4, 2025 use new section 19.03 (automatic change 275). Taxpayers using the small-taxpayer exception to stop § 263A capitalization use modified section 19.01 (automatic change 236).
- Taxpayers with an in-flight ruling. Anyone that filed a non-automatic Form 3115 before September 21, 2026 for a change now covered by the automatic procedures can convert and get the user fee back if they notify the national office in time.
Summary: what Rev. Proc. 2026-32 does
- Adds the OBBBA § 174, § 174A, and § 460(e) residential construction changes to the automatic-consent list in Rev. Proc. 2025-23.
- Waives the section 5.01(1)(d) and (f) eligibility rules of Rev. Proc. 2015-13 through 2027 for the R&E changes and through the first or second post-July 4, 2025 taxable year for the § 460(e) changes.
- Assigns automatic change number 236 to modified section 19.01 and number 275 to new section 19.03.
- Creates a November 15, 2026 duplicate-copy window that lets earlier filers choose the pre- or post-modification rules for section 7 or 19.01 changes.
- Allows conversion of pending non-automatic Form 3115s to the automatic procedures, with user-fee return, before the later of October 21, 2026 or the letter ruling.
Frequently asked questions about the OBBBA method change ❓
Q. What is the OBBBA method change under Rev. Proc. 2026-32?
It is the IRS automatic-consent procedure that lets taxpayers change their method of accounting for research or experimental expenditures under § 174 and § 174A after the One, Big, Beautiful Bill Act, and for residential construction contracts under § 460(e). Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 to open these changes and waive the usual eligibility rules for taxable years beginning before January 1, 2028.
Q. Do I still need to file Form 3115 for an OBBBA method change?
Yes. Every method change described in Rev. Proc. 2026-32 is still a change in method of accounting under §§ 446(e) and 481, so Form 3115 remains the vehicle. Rev. Proc. 2026-32 does not remove the form; it changes which section number of Rev. Proc. 2025-23 you file under, which automatic change number to enter, and, for several new changes, allows a reduced Form 3115 filing that completes only Part I, most of Part II, one line of Part IV, and Schedule D Part I.
Q. What automatic change numbers apply after Rev. Proc. 2026-32?
The revenue procedure keeps the § 174 and § 174A method-change numbers that already existed in section 7 of Rev. Proc. 2025-23 and adds two automatic changes for residential construction under § 460(e): number 236 for the small-taxpayer exception in modified section 19.01 of Rev. Proc. 2025-23, and number 275 for the new section 19.03, which covers contracts entered into in taxable years beginning after July 4, 2025.
Q. When does Rev. Proc. 2026-32 take effect?
Sections 7, 19.01, and 19.03 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2026-32, are effective for a Form 3115 filed after September 4, 2026. A duplicate copy of Form 3115 filed on or before November 15, 2026 for a change described in section 7 or 19.01 (prior to modification) is not subject to that effective date and can elect either the old or the modified procedure. A Form 3115 filed under the non-automatic procedures before September 21, 2026 and still pending can be converted to the automatic procedures if the taxpayer notifies the IRS national office before the later of October 21, 2026 or the issuance of a letter ruling.
Q. Which eligibility rules does Rev. Proc. 2026-32 waive?
It waives the eligibility rules in sections 5.01(1)(d) and 5.01(1)(f) of Rev. Proc. 2015-13 for the covered changes. Section 5.01(1)(d) is the general prohibition on making an automatic change in a year the taxpayer ceases the trade or business; section 5.01(1)(f) is the five-year prior-change bar. For § 174 and § 174A changes the waiver applies to any taxable year beginning before January 1, 2028; for the new § 460(e) changes it applies to the taxpayer’s first or second taxable year beginning after July 4, 2025.
Q. What is the deemed-compliance rule for residential construction contracts?
If, on or before September 21, 2026, a taxpayer filed a Federal income tax return for a taxable year beginning after July 4, 2025 and properly applied the accounting methods described in new section 19.03(1)(a) or (b) of Rev. Proc. 2025-23, the taxpayer is deemed to have complied with the automatic-consent procedures in § 446(e), § 1.446-1(e), and section 19.03. In effect, that early return acts as the method change for that contract population without a separate Form 3115 filing under Rev. Proc. 2026-32.
Q. How does Rev. Proc. 2026-32 change § 481(a) adjustments for R&E?
It adds coordination rules between the taxpayer’s existing method for recovering unamortized § 174 amounts and the current-year change. If the taxpayer previously changed to the recovery-of-unamortized-amount method, the § 481(a) adjustment for a current-year change under section 7.01 of Rev. Proc. 2025-23 must reflect that recovery method. If both changes are made concurrently in the first taxable year beginning after December 31, 2024, the § 481(a) adjustment period matches the amortization period elected under the recovery method. A negative modified § 481(a) adjustment can be implemented on a cut-off basis instead.
This article is general information about Rev. Proc. 2026-32 and the underlying OBBBA changes, not tax or accounting advice for your situation. Method changes depend on your prior methods, your § 481(a) history, and your filing calendar. If your business is affected, contact SW Accounting & Consulting Corp for a confidential review.
