Are foreign research costs deductible under Section 174A?

No. Section 174A's immediate expensing applies only to domestic research — research performed within the United States, its possessions, and territories. SRE expenditures attributable to research performed abroad remain under Section 174 and must be capitalized and amortized over 15 years, with a half-year of amortization in the first year.

What makes research 'foreign' for Section 174 purposes?

The physical location where the research activity is performed. Who employs the researchers, who pays, where the payer is incorporated, and who owns the resulting intellectual property are all irrelevant. A U.S. company paying a U.S.-domiciled vendor still has foreign research if the vendor's development team works overseas.

Do 2022–2024 foreign research balances get the OBBBA catch-up deduction?

No. The one- and two-year catch-up applies only to unamortized domestic Section 174 amounts, and the small-business retroactive election likewise reaches only domestic costs. Foreign SRE expenditures capitalized in 2022–2024 continue amortizing on their original 15-year schedules, into the late 2030s.

Foreign research and the 15-year rule that survived

The OBBBA rescued domestic research from amortization; it deliberately left foreign research behind. SRE expenditures attributable to research performed outside the United States, its possessions, and territories remain governed by Section 174: capitalized and amortized over 15 years, half-year convention in year one. The first-year deduction on a dollar of foreign research is about 3.3 cents, against 100 cents for the same work performed domestically. Congress kept the offshoring penalty on purpose.

What "foreign" means

The test is geographic and mechanical: research is foreign if performed outside the United States, its possessions, and territories (Puerto Rico and U.S. territories count as domestic). Everything else is noise — the employer's country, the paying entity, the contract's governing law, where the IP is registered. A German parent's Boston lab does domestic research; a Delaware corporation's Krakow engineering office does foreign research.

Mixed projects must be allocated. A product built by teams in Austin and Buenos Aires needs a reasonable split of the project's costs — labor hours and headcount are the usual keys — between the Section 174A deduction and the 15-year foreign pool. Allocable indirect costs follow the labor they support.

The contractor-location trap

The most common misclassification involves outsourced development. When a U.S. company hires a development firm and bears the financial risk (the standard time-and-materials or milestone arrangement), the payments are the company's SRE expenditures — situated wherever the contractor's people actually perform the work.

The traps, in ascending order of subtlety:

U.S. vendor, offshore delivery. A San Francisco-headquartered agency staffing the engagement from its Manila office produces foreign research. The invoice address proves nothing.
Blended delivery teams. Many outsourcers staff a U.S. account lead over an offshore build team. The costs must be split by where hours are worked — which requires staffing data most master service agreements never obligate the vendor to provide. Add a reporting covenant.
Remote employees abroad. A U.S.-payroll engineer spending six months working from Lisbon performs foreign research for those hours. Distributed-work policies written for immigration and payroll compliance now have a Section 174 dimension.
Subcontracting. The vendor's own subcontractors can move the work offshore without the customer's knowledge.

With a 30x first-year deduction differential, examiners have every incentive to probe situs, and the taxpayer bears the documentation burden: contractor staffing rosters, badge or timezone data, payroll work-location records, and contract terms requiring location reporting.

No credit, no catch-up, no exit

Three aggravating features complete the picture. First, foreign research generally produces no Section 41 credit — qualified research must be conducted in the United States — so the 15-year pool carries pure cost with no offsetting benefit (see Section 174 vs. Section 41). Second, foreign balances capitalized in 2022–2024 are excluded from every branch of the OBBBA transition relief; they keep amortizing into the late 2030s. Third, abandoning a foreign project does not accelerate recovery — amortization continues on schedule even after the research is worthless.

Companies re-shoring development in response should note that the benefit turns on where new work is performed going forward; it does nothing for the legacy foreign pool. And the classification workpapers feeding the split are the same ones that build the overall cost pool — see identifying SRE expenditures.