ZetrixwebWhat the rule does
Section 174 of the US tax code governs how research and experimental expenditures are deducted, and software development costs have generally fallen within it. After a period when all such spending had to be capitalized and amortized, the 2025 tax act, commonly called the One Big Beautiful Bill Act, restored immediate expensing for domestic research and experimental expenditures. Advisory summaries agree that spending on research conducted outside the United States stays on a 15-year amortization schedule, with foreign research defined as research conducted outside the US, Puerto Rico, and US possessions.
For a software company, that creates a potential difference between paying an engineer based in the US and paying one elsewhere, over and above salary levels and overhead.
Why this is a records problem
Whatever the exact application, practitioners advise that it becomes important to separate and document domestic and foreign activities. That is hard to reconstruct after the fact. If your team is split across locations, you need to be able to say, for a given period, which work was done where.
The records live in engineering systems: time tracking, tickets, repositories, contractor invoices, and statements of work. They are rarely organized with tax in mind.
| Record | What to capture | Where it lives |
|---|---|---|
| Statements of work | Description of work and where it is performed | Contracts |
| Time and effort | Hours by person, project, and location | Timesheets or tracking tools |
| Tickets and commits | Work item to person and project mapping | Issue tracker and repository |
| Invoices | Activities billed, by location | Finance system |
How to approach the decision
Compare the options on total cost, not headline rates: salary or fees, management overhead, tax treatment, and the cost of delay. In some cases the tax effect is modest next to other factors; in others it matters. Model both ways with your adviser using your real numbers.
If you do use distributed teams, set up location-aware records from the start. We work with clients on this because clear records also help with intellectual property, security, and audit readiness. Our earlier article on staffing under changing immigration rules covers the talent side.
Planning a distributed engineering model? Talk to us about structuring contracts and records, alongside your tax adviser.
Key takeaways
- The 2025 tax act restored immediate expensing for domestic research and experimental expenditures; research conducted outside the US remains on 15-year amortization.
- Software development costs generally fall within Section 174; the practical test described is where the research is conducted.
- Record where work is done through statements of work, time tracking, tickets, and invoices.
- Model total cost with a qualified tax adviser; we are a delivery firm and therefore have an interest, so verify independently.