For the past few years, Section 174 fundamentally changed how companies experienced the cost of R&D.

What used to be an immediate deduction became a forced capitalization regime — and for many tech companies, that created real cash-flow pain.

But starting in tax year 2025, an important shift changes the landscape again.

Domestic R&D is once again immediately deductible.
Foreign R&D is not.

That single distinction now drives one of the most important — and underappreciated — tax strategy decisions for software and technology companies.

What Changed in 2025 (and What Didn’t)

Beginning in tax year 2025:

• U.S.-based R&D expenses under Section 174 are fully deductible in the year incurred

• Foreign-based R&D expenses remain subject to 15-year amortization

This effectively restores the pre-TCJA treatment for domestic research — while leaving foreign research under a much harsher regime.

The result is a clear structural preference for U.S. innovation baked directly into the tax code.

Why This Is a Bigger Deal Than It Sounds

Immediate deductibility isn’t just an accounting technicality.

It affects:

• taxable income,

• cash flow,

• deferred tax balances,

• and how expensive innovation feels in real time.

For companies doing meaningful R&D, the difference between:

• deducting costs now, versus

• spreading them over 15 years,

can materially change hiring decisions, team location, and long-term planning.

Domestic R&D Now Has a Double Advantage

With the 2025 change, domestic R&D benefits from two powerful levers:

1. Immediate deductibility under Section 174, and

2. Eligibility for the R&D tax credit under Section 41.

That combination means U.S. R&D can:

• reduce taxable income right away,

• generate current-year or future tax credits,

• and create long-lived tax attributes through carryforwards.

Foreign R&D gets none of that symmetry.

Even if the headline labor cost is lower, the tax friction is dramatically higher.

The Credit Stack Matters More Now

The R&D credit still:

• applies only to qualified U.S. research,

• can offset income tax or payroll tax,

• and carries forward for 20 years federally.

When paired with immediate deductibility, the effective cost of domestic R&D drops significantly.

This is why many companies are discovering that:

“More expensive” domestic engineers can be cheaper after tax than offshore teams.

The math often surprises people — but it’s very real.

Why This Matters for Scaling and M&A

For companies thinking beyond the current year, this shift is even more important.

Domestic R&D:

• creates cleaner tax attributes,

• avoids long amortization tails,

• improves earnings quality,

• and simplifies diligence for investors and acquirers.

Foreign R&D, by contrast:

• builds up long-dated deferred tax assets,

• suppresses near-term earnings,

• and often raises questions during deal review.

In acquisition contexts, buyers care deeply about:

• how credits were generated,

• whether deductions were properly taken,

• and whether tax attributes are usable.

Domestic R&D checks those boxes far more cleanly.

This Is No Longer Just a Tax Rule — It’s a Strategy Signal

Congress didn’t make this change accidentally.

The 2025 shift sends a clear message:
U.S.-based innovation is being explicitly favored.

For tech companies, this turns Section 174 into a strategic lens — not just a compliance issue.

Where you place R&D now affects:

• near-term cash flow,

• long-term tax efficiency,

• and enterprise value.

The Takeaway

Starting in 2025, domestic R&D is uniquely advantaged:

• fully deductible,

• credit-eligible,

• and valuation-friendly.

Foreign R&D remains more expensive from a tax perspective — even if it looks cheaper on paper.

Companies that align their R&D footprint with this reality aren’t gaming the system.

They’re responding rationally to the incentives written into the code.