The 96-Point Tax Gap Hiding Behind "R&D Expensing Is Back"
Two engineers. Same company. Same project. One sits in Austin. One sits in Bangalore. The Austin engineer's salary vanishes from your taxes today. The Bangalore engineer's salary takes 15 years. That is a 96.67-point gap in year-one deductibility. And the headline just said "expensing is back."
The Wall
Here is what Congress did. The One Big Beautiful Bill created new Section 174A. Domestic R&D costs get a 100% write-off. Day one. Permanent. No sunset. This is the part every headline covered.
Good news. Real good news. If your research happens in America.
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The Chair Rule
The split turns on where the work gets done. Not who does it. Not who pays for it. Where the butt sits.
The IRS spelled it out: the foreign research rule "applies even if the research is done by American researchers, or performed for an American Taxpayer."
American citizen. American company. American project. Work done in Bangalore? Foreign. And no safe harbor reclassifies it.
Penalty One: The Slow Drip
Your Austin engineer costs $150,000. You write off $150,000 this year.
Your Bangalore engineer costs $150,000. You write off $5,000. The rest amortizes over 15 years, starting at the midpoint of the tax year. That's 3.33 cents on the dollar in year one.
Same work. Same dollar amount. One gets the whole grocery bag today. The other gets one grape a year for a decade and a half.
Penalty Two: The Credit Lockout
It gets worse. Section 41 is the R&D tax credit. Separate from the write-off. A bonus on top.
Congress rewrote it. The credit now requires expenses to qualify as domestic R&E under §174A. Foreign R&D gets zero credit. None.
The Austin engineer's salary qualifies for the instant write-off and the credit. The Bangalore engineer's salary qualifies for neither. Not today. The gap isn't just wide. It's a canyon with a fence on both sides.
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Penalty Three: The Zombie Rule
This is the one that turns the whole thing into a roach motel.
Say you kill the project. Fire the offshore team. Shut the Bangalore office. Walk away. You'd expect to write off the leftover balance, right? The project is dead. The money is spent. Take the loss and move on.
No.
Here is what the code says:
If any property with respect to which foreign research or experimental expenditures are paid or incurred is disposed, retired, or abandoned... no deduction or reduction to amount realized shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures.
I mean. Read that again. You abandon the project. The amortization keeps ticking on its original 15-year clock. You can't speed it up. You can't write off the rest. Congress even added new language blocking you from using it to reduce your gain if you sell the assets.
The money checked into a room with no door.
Sure.
This Is Not a Corner Case
India alone hosts 2,117 Global Capability Centers with 2.36 million employees. Those are the offshore engineering hubs where American companies park their dev teams. And software development costs are explicitly treated as R&E under §174A. Every line of code written overseas falls in this box.
You run a split team? You inherited this. Your payroll didn't change. Your tax bill did.
The Two Engineers
Look. Congress didn't hide this. It is right there in the code. Page 1,028. Footnote 4. The headline said "R&D expensing is back."
It is. For one of them.
