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

A company uses a mix of U.S.-based engineers and offshore developers to build its product. While both teams contribute to development, only the work performed within the United States is eligible for the R&D tax credit.

This means the company must separate qualifying domestic expenses from non-qualifying foreign costs to accurately calculate its credit.

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 using both U.S. and offshore development teams

Tech firms outsourcing part of their engineering work abroad

Businesses managing global product development teams

Companies evaluating domestic vs foreign R&D cost strategies

Organizations separating qualifying U.S. expenses from non-qualifying costs

Curious if you are missing out on credits?

Start with a quick eligibility check. If it looks promising, we move to a light info request and one technical interview.

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