How the One Big Beautiful Bill Act and new §174A reshaped the treatment of research and development spending
Almost every company that builds something new spends money to do it: engineers, prototypes, testing, software. For decades, the tax code treated that spending the same way no matter where the work happened. That is no longer true. With the One Big Beautiful Bill Act (OBBBA), Congress shifted the boundaries on research and development, and those new lines favor one thing above all: keeping the research in the United States.
If your business does R&D, or is deciding where to locate it, the shift matters. The immediate question is no longer only how much you spend, but where the work is performed and how quickly you get the tax benefit. Below is the arc of the change, from the world that existed before OBBBA to the specific rules and records that now decide the outcome.
The world before OBBBA: location did not matter
Before OBBBA, §174 was the home for a company’s R&D costs, and the deal was refreshingly simple. A taxpayer could either deduct research spending immediately or amortize it over a five-year period, at the taxpayer’s choice. Just as important is what the old rules did not do: for tax years beginning before 2022, the Code did not sort R&D into domestic and foreign buckets the way today’s provisions do. Research was research, wherever it happened.
That location-blindness is the backdrop for everything that follows. The pre-OBBBA choice carried its own logic. The immediate write-off was available where the spending was tied to the company’s trade or business and was not chargeable to a capital account (§174(a)(1)). The five-year amortization election, by contrast, was forward-looking only; it could not be applied retroactively. A company with no profit in a given year, or one expecting profits to climb, might rationally save deductions for when they would offset more income. The point is simply that the decision turned on timing and profit, never on geography.
What OBBBA changed: domestic and foreign are no longer equal
OBBBA introduced §174A, and it rewrote the playbook in both name and attitude. The new section splits R&D into two camps, domestic and foreign, and treats them very differently. Just as important, the domestic benefit is permanent: unlike the temporary repeal proposals that preceded it, §174A carries no sunset provision.
Domestic research keeps the taxpayer-friendly setup: deduct it now, or elect to capitalize and amortize it. Under §174A(c) the taxpayer can amortize over a period of not less than 60 months, beginning in the month it first realizes benefits from the research; a separate election under §59(e) allows a ten-year recovery instead. Foreign research gets the cold shoulder. If the work happens outside the United States, its states, territories, possessions, or Puerto Rico, the cost cannot be deducted up front. Instead it must be capitalized and amortized over fifteen years, far longer than any domestic option. The message is hard to miss: send the research abroad, and you wait far longer for the same benefit.
Transition relief for smaller taxpayers: two paths, one with less paperwork
I spoke with a colleague and R&D Expert at Deloitte who had made some of the following points. Notably, OBBBA also offers transition relief aimed at smaller taxpayers, and the two routes are not equally painless. The first is a retroactive election: eligible small businesses can go back and apply the new domestic treatment to the years the mandatory capitalization rules were in effect. In practice, that means amending up to three years of returns, and the administrative lift is real. Some taxpayers have pursued it, but the paperwork of reopening several years can eat into the benefit, so it is not clear how many actually captured the advantage.
The second route may be the more helpful one. A “deemed election” addresses the taxpayer that never complied with the mandatory capitalization requirement in the first place: rather than forcing a cleanup, the relief effectively takes those years off the hook. The important caveat is the research credit. If the taxpayer also claimed an R&D credit for those years, the interaction with §280C can get messy, so the deemed election is cleanest where no credit was claimed.
The 80% rule: a lifeline for companies with a global footprint
For businesses that operate across borders, the dividing line under §174A is geographic: the treatment turns on where the work is performed, not on the type of activity or on any wage-percentage safe harbor. “Domestic” expenditures are those not attributable to foreign research within the meaning of §41(d)(4)(F). A company with both U.S. and foreign R&D teams must therefore allocate its costs by location. U.S.-based wages and contractor payments fall on the domestic side and are immediately deductible under §174A; non-U.S.-based wages and contractor payments fall under §174 and must be amortized over fifteen years.
There is a separate 80% rule worth not confusing with the location test. Under the §41 credit’s “substantially all” rule, if 80% or more of an employee’s services during the year constitute qualified services, then 100% of that employee’s wages may be counted as a qualified research expense (QRE). That threshold governs whether a mixed-role employee’s full wages qualify for the credit; it does not convert foreign-performed research into domestic research. There is no §174A safe harbor that reclassifies foreign work as domestic based on an 80% test, so precise, well-documented allocation by location remains essential.
The layer worth understanding: the research credit under §38 and §41
There is a second benefit that sits on top of the deduction, and it is often the more valuable one. Both before and after OBBBA, domestic research can pull double duty, qualifying under §174 (or now §174A) and, separately, as a research credit under §38 and §41.
Why does the credit matter more? Because a credit is a dollar-for-dollar reduction of the tax you owe, while a deduction only lowers taxable income and is then diluted by your tax rate. Mechanically, §38 governs general business credits, and §38(b)(4) is the hook that lets the §41 research credit join that group. Once inside, the research credit is aggregated with other general business credits into a single limitation and carryover framework, which is where much of the planning value lives. There is a ceiling: under §38(c)(1)(A)–(B), the total business credit for the year cannot exceed the taxpayer’s net income tax over the greater of the tentative minimum tax for the year or 25% of net regular tax liability above $25,000.
One line held firm through OBBBA. Foreign research still does not qualify for the credit. §41(d)(4)(F) excludes it from being a QRE, and OBBBA left that untouched. The continuity is telling: on the credit side, the statute has long watched the domestic-versus-foreign line, and it still does.
What to do now: build the record before you need it
Because the benefit now turns on where the work happens, the supporting record becomes the difference between claiming a position and defending it. Alongside monitoring IRS developments, particularly around remote work, which the public comments have flagged, companies should:
- Prepare for audit scrutiny over how R&D is designated as domestic or foreign.
- Retain records substantiating credit eligibility under §41 (see IRS Field Attorney Advice FAA 20212501F on §41 research credit claims).
- Track the location of remote research, especially where multiple jurisdictions are involved.
The throughline
Step back, and the picture is clear. OBBBA and §174A redrew the map for R&D, rolling out the red carpet for domestic research while leaving foreign work in the slower, fifteen-year line. Foreign research is not off the table; it simply will not stretch as far as the domestic dollar. Layer §§38 and 41 on top, and qualifying domestic research can be both deducted and credited. Just as valuable in practice is the flexibility of how domestic research can be treated: the choice between immediate expensing and amortization gives companies a lever to serve other planning goals, from managing §163(j) interest limitations to international tax positioning and, to a lesser degree, the corporate alternative minimum tax (CAMT). The takeaway for any company weighing where to build: do the research at home, and the Code now rewards you for it, immediately.
The author gratefully acknowledges the research assistance of Chloe Hooten, Legal Intern at Shields Legal Group, in the preparation of this article.
Knowing the map is one thing; choosing a route is another. A follow-up piece will turn these rules into practical decisions: weighing immediate expensing against the amortization election, structuring a workforce with the §41 80% test in mind, reassessing research already underway, and drafting R&D and contractor agreements that reduce foreign-research exposure. If your team is deciding where to locate research, reassessing current projects, or documenting the domestic/foreign split, we would be glad to help.
This article is general information about federal tax developments and is not legal or tax advice. The rules described take effect as provided under the One Big Beautiful Bill Act; their application depends on a company’s specific facts. Consult qualified counsel before acting.
