In Revenue Procedure 2026-32, the IRS modifies the procedures for obtaining automatic consent to make accounting method changes for research or experimental (R&E) expenditures to comply with (1) IRC Section 174, as in effect under the Tax Cuts and Jobs Act (TCJA) (i.e., after December 22, 2017, and before July 4, 2025) (TCJA Section 174), and (2) IRC Section 174 and 174A, as in effect under the One Big Beautiful Bill Act (OBBBA) (i.e., on or after July 4, 2025). Revenue Procedure 2026-32 also modifies the guidance in Revenue Procedure 2025-28. For more information on the automatic method changes introduced by Revenue Procedure 2025-28, see EY Tax Alert 2025-1914.

Revenue Procedure 2026-32 also includes procedures for obtaining automatic consent to change accounting methods for certain contracts entered into in tax years beginning after July 4, 2025, to comply with IRC Section 460(e), as amended by the OBBBA. For more information on the OBBBA revisions to IRC Section 460(e), see EY Tax Alert 2025-1432.

Revenue Procedure 2026-32 modifies Sections 7 and 19.01 of Revenue Procedure 2025-23 and adds new Section 19.03, effective for a Form 3115, Application for Change in Accounting Method, filed after September 4, 2026. Transition rules apply if certain requirements are met, as discussed later.

Modifications to Section 7 of Revenue Procedure 2025-23

Eligibility rules for changes made under Section 7.01(1)(a), 7.02(3) or 7.03(1)(a)

Revenue Procedure 2026-32 extends the waiver of the eligibility rules in Section 5.01(1)(d) and Section 5.01(1)(f) of Revenue Procedure 2015-13 for changes made under Sections 7.01(1)(a), 7.02(3) and 7.03(1)(a) of Revenue Procedure 2025-23. The eligibility rule in Section 5.01(1)(d) prohibits method changes from being made under the automatic consent procedures in the final year of the applicant's trade or business. The eligibility rule in Section 5.01(1)(f) prohibits method changes from being made under the automatic consent procedures if the applicant made a change for the same item within the prior five years.

Specifically, those eligibility rules are waived for the following changes if made for a tax year beginning before January 1, 2028:

• A change described in Section 7.01(1)(a) of Revenue Procedure 2025-23, as modified by Revenue Procedure 2025-28 (designated change number (DCN) 265), which includes a change in method of accounting for domestic R&E expenditures to comply with TCJA Section 174
• A change described in Section 7.02(3) of Revenue Procedure 2025-23, as modified by Revenue Procedure 2025-28 (DCN 273), which includes various OBBBA-related method changes for domestic R&E expenditures
• A change described in Section 7.03(1)(a) of Revenue Procedure 2025-23, as modified by Revenue Procedure 2025-28 and Revenue Procedure 2026-32 (DCN 274), which includes a change in method of accounting for foreign R&E expenditures to comply with TCJA Section 174 and IRC Section 174, as in effect under the OBBBA             

Computation of IRC Section 481(a) adjustment period for certain changes made under Section 7.01(1)(a)

The revenue procedure modifies Section 7.01(3)(a)(i) of Revenue Procedure 2025-23 to require a taxpayer that makes a change under Section 7.01(1)(a) and that previously made a method change to the recovery-of-unamortized-amount method in Section 7.02(2)(f) for a prior tax year to reflect the recovery-of-unamortized-amount method in the IRC Section 481(a) adjustment for the change made under Section 7.01(1)(a). In other words, the computation of the IRC Section 481(a) adjustment for the change made under Section 7.01(1)(a) must reflect the impact of the accelerated amortization of domestic R&E costs taken into account before the year of change under the recovery-of-unamortized-amount method change.

Modified IRC Section 481(a) adjustment period for certain changes made under Section 7.01(1)(a)

Revenue Procedure 2026-32 further modifies Section 7.01(3)(a) of Revenue Procedure 2025-23 by adding new Section 7.01(3)(a)(iii), which addresses the IRC Section 481(a) adjustment period when a taxpayer makes (i) a change under Section 7.01(1)(a) and a recovery-of-unamortized-amount method change concurrently for the first tax year beginning after December 31, 2024, or (ii) a change under Section 7.01(1)(a) for a year after the year in which the taxpayer makes a recovery-of-unamortized-amount method change. In the concurrent change scenario, the IRC Section 481(a) adjustment period for the change made under Section 7.01 must match the amortization period chosen under the recovery-of-unamortized-amount method change. That is, the net positive IRC Section 481(a) adjustment in that scenario would either be taken into account (i) in full in the year of change or (ii) ratably over two years beginning with the year of change. In the non-concurrent change scenario, the net positive IRC Section 481(a) adjustment for a change made under Section 7.01 must be recognized over the amortization period remaining under the recovery-of-unamortized-amount method change made in the prior year.

Modified Section 7.03 applicability

Revenue Procedure 2026-32 modifies Section 7.03, which was added to Revenue Procedure 2025-23 by Revenue Procedure 2025-28, to extend the availability of the change to comply with IRC Section 174, as amended by the OBBBA, for foreign R&E expenditures. Specifically, Revenue Procedure 2026-32 deletes the reference to "for taxable years beginning before January 1, 2026" in Section 7.03(1)(a)(iii) and extends the availability of this change to 2026 and subsequent tax years. Section 7.03(1)(a), as revised, is available to taxpayers that want to:

• Comply with TCJA Section 174 for foreign R&E expenditures paid or incurred in tax years beginning before January 1, 2025
• Rely on interim guidance in Sections 3, 4, 5, 6 or 7 of Notice 2023-63, as modified by Notice 2024-12, for foreign R&E expenditures
• Comply with the changes made to TCJA Section 174 by the OBBBA for foreign R&E expenditures paid or incurred in tax years beginning after December 31, 2024

The IRC Section 481(a) adjustment provisions in Section 7.03(3)(a) of Revenue Procedure 2025-23 remain unchanged by Revenue Procedure 2026-32. A change made under Section 7.03(1)(a)(i) or (ii) of Revenue Procedure 2025-23 to comply with TCJA Section 174 or to rely on Notice 2023-63 is made with a modified IRC Section 481(a) adjustment that takes into account only expenditures paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2025. A change made under Section 7.03(1)(a)(iii) of Revenue Procedure 2025-23 to comply with IRC Section 174, as amended by the OBBBA, is made on a cut-off basis for the first tax year beginning after December 31, 2024, and for all other tax years, with a modified IRC Section 481(a) adjustment that takes into account only expenditures paid or incurred in tax years beginning after December 31, 2024.

Modifications to Section 19 of Revenue Procedure 2025-23

Changes to Section 19.01

Revenue Procedure 2026-32 modifies the scope of Section 19.01 of Revenue Procedure 2025-23 (DCN 236) to allow a taxpayer to obtain automatic consent to stop capitalizing costs under IRC Section 263A for residential construction contracts (including home construction contracts) that meet the requirements of IRC Section 460(e)(1)(B)(i) and (ii). As modified by Revenue Procedure 2026-32, Section 19.01 of Revenue Procedure 2025-23 now applies to a small-business taxpayer that wants to change its accounting method for the following types of construction contracts:

• For exempt construction contracts described in IRC Section 460(e)(1)(B), from the percentage-of-completion accounting method in Treas. Reg. Section 1.460-4(b) to an exempt contract method of accounting in Treas. Reg. Section 1.460-4(c)
• For contracts entered into in tax years beginning on or before July 4, 2025, to stop capitalizing costs under IRC Section 263A for home construction contracts described in IRC Section 460(e)(1)(A), as in effect before the OBBBA, that meet the requirements of IRC Section 460(e)(1)(B)(i) and (ii)

Or

• For contracts entered into in tax years beginning after July 4, 2025, to stop capitalizing costs under IRC Section 263A for residential construction contracts described in IRC Section 460(e)(1)(A), as amended by the OBBBA, that meet the requirements of IRC Section 460(e)(1)(B)(i) and (ii)

The change does not apply in the first tax year in which a taxpayer enters into a contract for which the taxpayer may adopt a permissible accounting method. Taxpayers must make the change on a cut-off basis, applying the new method only to contracts entered into on or after the first day of the year of change. Accordingly, an IRC Section 481(a) adjustment is not allowed.

The eligibility rules in Section 5.01(1)(d) or (f) of Revenue Procedure 2015-13 do not apply to a change in Section 19.01(1)(c) of Revenue Procedure 2025-23 for the taxpayer's first or second tax year beginning after July 4, 2025.

New Section 19.03

Revenue Procedure 2026-32 adds a new Section 19.03 to Revenue Procedure 2025-23 (DCN 275), which applies to taxpayers that want to change their accounting method for residential construction contracts that they enter into in tax years beginning after July 4, 2025. Under Section 19.03, taxpayers may:

• Change from the percentage-of-completion method of accounting described in Treas. Reg. Section 1.460-4(b) or the percentage-of-completion / capitalized cost method of accounting described in Treas. Reg. Section 1.460-4(e) to an exempt contract accounting method described in Treas. Reg. Section 1.460-4(c)

Or

• Start capitalizing costs under IRC Section 263A for contracts that do not meet the IRC Section 460(e)(1)(B)(i) and (ii) requirements

The change does not apply in the first tax year in which a taxpayer enters into a contract for which the taxpayer may adopt a permissible accounting method. Consistent with the manner of making the changes in Section 19.01, taxpayers must make the change on a cut-off basis by applying the new method only to contracts entered into on or after the first day of the year of change.

Like the change under Section 19.01, the eligibility rules in Section 5.01(1)(d) or (f) of Revenue Procedure 2015-13 do not apply to a change in Section 19.03 of Revenue Procedure 2025-23 for the taxpayer's first or second tax year beginning after July 4, 2025.

Transition rules

Transition rule for a change described in Section 7 or 19.01

Under Section 6.02 of Revenue Procedure 2026-32, a taxpayer may choose to implement the accounting method change under either the automatic change procedures under Section 7 or 19.01 of Revenue Procedure 2025-23, as modified by Revenue Procedure 2026-32 (the New Procedures) or the automatic change procedures in Revenue Procedure 2025-23 before modification by Revenue Procedure 2026-32 (the Old Procedures), provided:

• On or before November 15, 2026, the taxpayer properly files the duplicate copy of a Form 3115 for a change described in the Old Procedures
• The taxpayer continues to be eligible for the automatic change procedures under the New Procedures

A taxpayer that chooses to implement a change under the Old Procedures does not need to resubmit a previously filed duplicate copy of the Form 3115. However, a taxpayer that chooses to implement the change under the New Procedures must resubmit the duplicate copy of the Form 3115 to the IRS in Ogden, UT, for the year of change. The resubmitted copy must include "FILED UNDER REV. PROC. 2026-32, AS PROVIDED IN SECTION 6.02(2)(b) OF REV. PROC. 2026-32" at the top of the page.

For purposes of the eligibility rules in Section 5 of Revenue Procedure 2015-13, a duplicate copy of the resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the duplicate copy of the Form 3115 requesting the change under the Old Procedures; Section 6.02 does not extend the date the taxpayer must file either the resubmitted duplicate copy or original Form 3115 under Section 6.03(1)(a) of Revenue Procedure 2015-13.

Transition rule for a change described in Section 19.03

Taxpayers filing a federal income tax return for a tax year beginning after July 4, 2025, on or before September 21, 2026, are deemed to have complied with the procedures to change their method of accounting for contracts described in Section 19.03(1) of Revenue Procedure 2025-23, as modified by Revenue Procedure 2026-32, if they properly apply the methods of accounting in Section 19.03(1)(a) or (b) for that tax year.

Conversion of non-automatic changes

Under Section 6.03 of Revenue Procedure 2026-32, taxpayers have a limited time to convert the Form 3115 to an automatic change if:

• They properly filed an accounting method change described in Section 7, 19.01 or 19.03 of Revenue Procedure 2025-23, as modified by Revenue Procedure 2026-32, under the non-automatic change procedures in Revenue Procedure 2015-13 before September 21, 2026
• The accounting method change is still pending with the IRS on September 21, 2026.

To convert the change under the procedures in Section 6.03 of Revenue Procedure 2026-32, the taxpayer must timely notify the national office contact person of its intent to make the change under the automatic change procedures before the later of (i) October 21, 2026, or (ii) the issuance of the letter ruling granting or denying consent for the change. The national office will then send a letter acknowledging the request to follow the automatic change procedures and will return the user fee submitted with Form 3115.

The taxpayer will then have to resubmit a Form 3115 that conforms to the automatic change procedures, with a copy of the national office letter attached. The taxpayer must resubmit the Form 3115 that conforms to the automatic change procedures within 30 calendar days of the date of the national office's letter acknowledging the taxpayer's request, but no later than the date the taxpayer must file the duplicate copy of the Form 3115 under Section 6.03(1)(a)(i)(B) of Revenue Procedure 2015-13.

For purposes of the eligibility rules in Section 5 of Revenue Procedure 2015-13, the duplicate copy of the timely resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the converted Form 3115 under the non-automatic change procedures in Revenue Procedure 2015-13. Section 6.03 of Revenue Procedure 2026-32 does not extend the date the taxpayer must file the original (converted) Form 3115 under Section 6.03(1)(a)(i)(A) of Revenue Procedure 2015-13.

Implications

Extension of prior-five-year-item-eligibility-rule waiver

The extension of the waiver of the eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13 (i.e., the prior-five-year-item eligibility rule) to tax years beginning before January 1, 2028, for changes made under Sections 7.01, 7.02 and 7.03 of the New Procedures is the most broadly applicable form of relief provided by Revenue Procedure 2026-32. The extension addresses concerns raised by taxpayers and practitioners after Revenue Procedure 2025-28 was released regarding situations in which Revenue Procedure 2025-28 prevented (or would have prevented) a taxpayer from using the automatic change provisions to make a change for the 2025 tax year to comply with TCJA Section 174 (for domestic or foreign R&E expenditures) or IRC Section 174A (for domestic R&E expenditures). In extending the waiver of the prior-five-year-item eligibility rule through 2027 tax years, taxpayers that would otherwise have been forced into the non-automatic consent procedures under Revenue Procedure 2015-13 for certain changes for R&E costs to comply with TCJA 174 or IRC Section 174A can now make those changes under the automatic change provisions for 2025 and applicable later tax years.

Taxpayers may want to consider promptly revisiting any procedural plan that may have involved filing a change otherwise described in Sections 7.01, 7.02 or 7.03 of Revenue Procedure 2025-23 under the non-automatic change provisions, now that the change likely can be made with automatic consent for 2025 and applicable later tax years. Given the procedural impact a change in method of accounting for R&E costs incurred in 2022 — 2024 tax years would have had on certain OBBBA-related method changes for the 2025 tax year, taxpayers that had planned to pass on making a change in method of accounting for R&E costs incurred under the TCJA in those years may want to reconsider that decision.

Coordinating the recovery-of-unamortized-amount method with the IRC Section 481(a) adjustment for DCN 265

A net positive IRC Section 481(a) adjustment is generally taken into account ratably over four tax years under Section 7.03(1) of Revenue Procedure 2015-13. However, the coordination rule in Section 7.01(3)(a)(iii) of the New Procedures departs from the normal IRC Section 481(a) spread period rules for a taxpayer that makes both a change under Section 7.01 and a change to the recovery-of-unamortized-amount method as described previously. Notably, the IRC Section 481(a) adjustment rule only applies for a DCN 265 filed under the New Procedures. See the later discussion on additional implications of the transition rules in Revenue Procedure 2026-32.

A compressed IRC Section 481(a) adjustment period for a DCN 265 change can affect more than the timing of including the adjustment in taxable income. Taxpayers should consider modeling the effect of a shortened IRC Section 481(a) adjustment period on the adjusted taxable income (ATI) computation for purposes of computing the limitation on business interest under IRC Section 163(j). The shortened IRC Section 481(a) adjustment period and resulting increase to taxable income may also affect the corporate alternative minimum tax under IRC Section 55, the base erosion and anti-abuse tax under IRC Section 59A, the deduction for foreign-derived deduction eligible income under IRC Section 250 and foreign tax credit expense apportionment under IRC Section 861, among other provisions of the IRC.

Taxpayers choosing to file a change under Section 7.01 of the New Procedures should weigh the results of any relevant modeling in determining the appropriate procedural course, such as whether to avail themselves of the transition rules in Revenue Procedure 2026-32, or whether to implement the recovery-of-unamortized-amount method with a one-year or two-year recovery period, if at all.

OBBBA R&E method changes for 2026 and later tax years

The removal of the pre-2026 tax year limitation in Section 7.03(1)(a)(iii) of the Old Procedures enables taxpayers to file automatic accounting method changes for foreign R&E expenditures for 2026 and later tax years (under the New Procedures) to comply with IRC Section 174, as modified by the OBBBA. Under the Old Procedures, the change to comply with the OBBBA amendments to IRC Section 174 for foreign R&E expenditures was available only for tax years beginning after December 31, 2024, and before January 1, 2026. Although both the TCJA and OBBBA generally require taxpayers to capitalize and amortize their foreign R&E expenditures ratably over 15 years, the New Procedures retain the delineation between TCJA and OBBBA changes for foreign R&E expenditures, likely because the amendments made to IRC Section 174 by the OBBBA are generally effective for expenditures incurred in tax years beginning after December 31, 2024. Taxpayers should be mindful of this delineation when preparing Forms 3115 for changes made under Section 7.03 of the New Procedures for foreign R&E expenditures.

Although the New Procedures remove the pre-2026 tax year limitation for foreign R&E expenditure changes in Section 7.03(1), they retain the pre-2026 tax year limitations in Section 7.02(3)(a) of the Old Procedures, which includes changes to comply with IRC Section 174A for domestic R&E expenditures. As a result, a change to comply with IRC Section 174A is still only available under the automatic consent procedures if made for a tax year beginning before January 1, 2026.

Residential construction contracts

Revenue Procedure 2026-32 outlines the necessary procedures under which a taxpayer can obtain automatic consent to change methods of accounting for residential construction contracts that are now exempt from the general requirement to use the percentage-of-completion method under IRC Section 460(e)(1), as amended by the OBBBA (mainly, certain residential construction contracts that are not home construction contracts). Consistent with the regulations under IRC Section 460 on the manner in which accounting method changes for contracts subject to IRC Section 460 are implemented, Revenue Procedure 2026-32 implements the changes described in Sections 19.01 and 19.03 of Revenue Procedure 2025-23, as modified, on a cut-off basis, so they apply only to contracts entered into on or after the year of change. Accordingly, a taxpayer changing to an exempt IRC Section 460 method for residential construction contracts described in IRC Section 460(e)(1), as amended by the OBBBA, may need to simultaneously maintain two methods of accounting beginning with the year of change: (i) the method employed previously for contracts that are entered into before the year of change and are still in progress in the year of change, and (ii) the new method of accounting for contracts entered into within or after the year of change.

A consequence of the OBBBA's amendments to IRC Section 460(e)(1) for residential construction contracts that are not home construction contracts is that property produced under those contracts is now subject to IRC Section 263A, unless the taxpayer satisfies the requirements in IRC Section 460(e)(1)(B)(i) and (ii); that is, the contract is anticipated to be completed within three years, and the taxpayer satisfies the gross receipts test under IRC Section 448(c). Section 19.01 of Revenue Procedure 2025-23, as modified by Revenue Procedure 2026-32, provides the procedures for small-business taxpayers to stop applying IRC Section 263A to applicable residential construction contracts to the extent the taxpayer was previously applying IRC Section 263A to property produced under those contracts. Otherwise, new Section 19.03 of Revenue Procedure 2025-23, added by Revenue Procedure 2026-32, outlines procedures to begin applying IRC Section 263A to property produced under relevant residential construction contracts.

The OBBBA did not change the rules for determining whether property produced under a home construction contract is exempt from the requirements of IRC Section 263A (IRC Section 263A still does not apply if it is anticipated the contract will be completed within two years and the taxpayer satisfies the gross receipts test under IRC Section 448(c)). A change to stop applying IRC Section 263A to applicable home construction contracts continues to be available under the automatic change provisions under Section 19.01 of Revenue Procedure 2025-23. Small-business taxpayers should evaluate applicable residential construction contracts for possible exemption from IRC Section 263A given the more favorable three-year "test period" that applies for purposes of satisfying the rule in IRC Section 460(e)(1)(B)(i) for those contracts.

Transition rules for automatic changes filed on or before November 15, 2026

Although Revenue Procedure 2026-32 is generally effective as of September 4, 2026, the transition rule in Section 6.02 of that Revenue Procedure allows a taxpayer to choose to follow the Old Procedures by filing the duplicate copy of Form 3115 by November 15, 2026. That decision requires an affirmative choice by the taxpayer and may be based on administrative ease (e.g., the Form 3115 copy was already filed under the pre-modified Revenue Procedure or is in-process and no updates would need to be made). It may also be based on differences in the terms and conditions associated with the automatic method change provisions under the New Procedures and the Old Procedures (e.g., a taxpayer whose method change has newly become automatic under Revenue Procedure 2026-32 will have to file under the New Procedures).

Conversion procedures for non-automatic method change requests pending on September 21, 2026

Taxpayers that are considering converting their non-automatic change request to an automatic method change may want to evaluate conversion promptly; notification of the conversion is due by the later of October 21, 2026, or the issuance of a letter ruling, while the resubmitted Form 3115 is due by the earlier of the 30th day after the acknowledgment letter or the normal due date for filing the duplicate copy (i.e., no later than the date the tax return for the year of change is timely filed with the original copy of the automatic Form 3115).

Alternatively, taxpayers could consider withdrawing the non-automatic change under the more generally applicable withdrawal procedures in Section 9.12 of Revenue Procedure 2026-1 and refiling the change under the automatic procedures. This approach may be preferred for taxpayers that intend to file their returns imminently, as it would not necessitate receiving a conversion letter from the IRS national office contact and attaching the letter to the automatic Form 3115, which could delay the overall filing process.