R&D Tax Credits

Do offshore or foreign R&D expenses qualify?

No. Only U.S.-based R&D activities qualify for the federal R&D credit. Expenses for work performed outside the U.S, even if paid to a U.S. company that subcontracts overseas, do not qualify. Under the OBBBA, foreign R&D still requires 15-year amortization.

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Expanded Answer

Do foreign or offshore R&D expenses count toward the credit?

Generally, no. The R&D Tax Credit under IRC Section 41 applies only to domestic (U.S.-based) research activities and expenses.

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Key points:

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1. Wages paid to employees performing R&D work must be for work conducted in the United States

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2. Payments to foreign contractors performing research outside the U.S. do not qualify

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3. Under the OBBBA, immediate expensing of R&D costs in the year incurred applies to domestic R&D only — foreign R&D continues to be amortized over 15 years

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If your company uses offshore development resources, only the U.S.-based portion of qualifying expenses may be claimed. IRS reference on domestic research requirements: https://www.irs.gov/instructions/i6765

What Qualifies

Activities that commonly qualify

Developing new software features or platform capabilities

Improving performance, scalability, reliability, or security

Building internal tools or technical workflows that required experimentation

Testing different technical approaches to solve engineering challenges

What Does Not Qualify

Work that usually does not qualify

Routine bug fixes with no technical uncertainty

Visual-only updates or minor design changes

Marketing, sales, and customer support work

General maintenance that did not require experimentation

Work already solved through an off-the-shelf implementation

Example Case Study

Example of how domestic vs. offshore R&D impacts eligibility

Imagine a platform company rebuilding part of its backend to improve speed and support a larger customer base. The engineering team tests multiple database structures, adjusts the API layer, and runs repeated performance evaluations before settling on a final approach.

In that scenario, the wages tied to those technical activities may qualify. The same can be true for contractor costs and certain cloud expenses when they are directly connected to the development effort.

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Quick takeaway

If your team had to work through technical uncertainty, there is a good chance the work deserves a closer look.

Common Industry Examples

Companies tracking technical projects and development timelines

Engineering teams logging work across multiple initiatives

Businesses using contractors for technical development

Firms maintaining payroll and expense records tied to R&D

Organizations documenting experimentation and testing processes

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