New Section 174A rules sharpen the case for U.S.-based R&D

Section 174A changes cash-tax timing. Domestic R&D is now deductible. Foreign R&D recovers over 15 years.

What changed in Sections 174 and 174A

R&D location strategy is not only a talent and operating-model decision. It is increasingly a cash-tax timing decision.

For tax years beginning after Dec. 31, 2021, Section 174 generally required companies to capitalize and amortize research and experimental (R&E) expenditures over five years for domestic research and 15 years for foreign research, using a mid-year convention, pushing deductions beyond the year cash is spent.

Section 174A now permits an immediate deduction for domestic R&E while foreign R&E generally remains on a 15-year recovery schedule. The wider timing gap can change the after-tax economics of incremental R&D investment and, for some companies, influence where new projects launch.

Section 174A generally restores current-year cost recovery for domestic R&E, while foreign R&E remains a long-tail deduction. Taxpayers also have elections and transition rules that can change timing, so modeling matters.

Domestic vs. foreign R&D: The timing gap

How the timing gap changes offshore economics

For years, many companies used a distributed R&D operating model driven by labor costs. But when foreign R&E deductions span 15 years, the tax timing difference can erode a meaningful portion of those savings.

A simple timing example demonstrates the difference.

A $1 million example

Spend $1 million on qualifying domestic R&E and—under Section 174A—you generally deduct the entire amount in the current year. Spend $1 million on foreign R&E and, under the midyear convention on a 15-year schedule, the first-year deduction is about $33,333, or roughly 1/30 of the cost.

That delay matters. A dollar deducted years from now is worth less than a dollar deducted today, particularly when borrowing costs are high.

Cross-border effects on GILTI and BEAT

Foreign R&E capitalization not only delays deductions but can also raise near-term cash taxes for companies in a taxable position. In many multinational structures, deferring foreign R&E deductions can increase controlled foreign corporation (CFC) tested income and increase global intangible low-taxed income (GILTI) inclusions, depending on how the group funds R&D and records the related costs.

Foreign R&E capitalization can also affect other computations, including the base erosion and anti-abuse tax (BEAT), but BEAT outcomes are more fact-specific. Section 174A timing elections and cross-border R&D charging arrangements can affect BEAT modified taxable income, the base erosion percentage calculation, and the resulting BEAT liability.

How the deduction and the R&D tax credit work together

For many companies, a key onshore tax advantage is the combination of current-year domestic expensing under Section 174A and the Section 41 R&D tax credit, also known as the Research Credit. The benefit is often maximized when finance and tax model the deduction and the credit together, including the related elections and coordination rules.

Questions to model for 2026

If your organization operates a global R&D model, these questions often drive the first round of analysis:

• Is the labor arbitrage still worth it? Do wage savings offset the 15-year recovery period for foreign R&E when you discount the cash flows?

• Are costs sourced correctly? Can the company support domestic vs. foreign R&E classification with detailed, auditable records?

• What is the plan for the unamortized tail? For domestic R&E capitalized in 2022–2024, what is the strategy for the remaining amortization and available transition elections?

• What happens at the state level? Federal treatment does not automatically carry to the states. Conformity varies, and state guidance can change the cash-tax answer.

What CFOs should do next

Section 174A changes the economic timing of R&D by widening the cost-recovery gap between domestic and foreign R&D. That timing shift can make U.S.-based R&D more attractive at the margin for many companies.

But tax is rarely the only factor in R&D location decisions. Talent access, hiring speed, intellectual property (IP) strategy, operating model, and regulatory constraints can outweigh tax timing.

A more defensible approach is scenario modeling:

• Quantify the cash-tax difference across domestic and offshore footprints,

• Stress-test cross-border impacts, and

• Confirm state conformity before moving headcount or opening new R&D centers.

How Acena supports location modeling

Acena Consulting works with CFOs and tax teams to quantify Section 174 and Section 174A exposure, model R&D location scenarios, and develop documentation to support cost-sourcing and R&D tax credit positions. For a location-impact model of your current footprint, Acena can begin by identifying cost pools, the entity structure, and how R&E costs are tracked today.

Next steps: Consultations, webinars, and updates

Optimize your tax strategy. Schedule a complimentary R&D consultation with Randy Eickhoff, CPA, Founder & Head Coach of Acena Consulting, for expert guidance.

Register for our free monthly webinar, next on March 17, 2026: Cracking the (Tax) Code for R&D.

• This workshop provides one continuing education (CPE) credit for professionals maintaining their continuing education (CEs).

• Discover more about qualifying and documenting R&D activities to receive tax incentives.

Visit our Acena Events page to sign up for our newsletter and stay abreast of all upcoming events.

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Photo courtesy of AS Morton on Flickr.