Under current US tax law, American companies must spread deductions for foreign research and development spending over 15 years, while domestic R&D can be deducted immediately, according to a new analysis published by the Tax Foundation. The report finds that this gap—created when the One Big Beautiful Bill Act reversed amortization rules for domestic R&D but left foreign R&D untouched—creates a competitive disadvantage for US firms investing abroad. The divergence is recent: in the early 2020s, the US briefly required amortization for all R&D before reversing course only for domestic spending.
The report explains the mechanics using the Hall-Jorgenson framework, a foundational 1967 model for investment behavior. When firms can immediately expense R&D—meaning they recover the full value of their investment in tax deductions upfront—the effective marginal tax rate on a breakeven project drops to zero, and the tax system doesn't discourage investment. But when deductions are spread over 15 years with no expensing option, the present value of those deductions falls below full recovery, raising what economists call the "user cost of capital"—the hurdle rate a project must clear before a company will invest. The report states that amortization "drives the user cost of capital above where it lies in the no-tax baseline, raising the hurdle rate" and making the tax "a disincentive at the margin." Under Section 174A, US taxpayers can choose to immediately deduct domestic R&D or amortize it over at least 60 months, but foreign R&D under Section 174 gets no such choice.
The report argues that domestic and foreign R&D aren't competitors—they're complements. Economists Gary Hufbauer, Theodore Moran, and Lindsay Oldenski found that "global R&D expenditures and operations of US MNCs may create complementary capabilities and interdependent competencies, rather than simply displacing one capability or competency from location A to location B." Foreign R&D often involves adapting US products for overseas markets—making them compatible with foreign languages, climates, payment systems, or regulatory approval processes—or acquiring foreign research teams whose ideas can scale quickly with US infrastructure. According to the authors, "measures to hinder or slow the globalization of R&D by US multinationals will stifle R&D by those multinationals in the United States." The Information Technology and Innovation Foundation similarly finds that offshore research tends to complement domestic innovation by speeding up localized product adaptation and expanding firms' knowledge networks.
Harsher tax treatment also puts US companies at a disadvantage in cross-border mergers and acquisitions, the report warns. If a foreign firm's future R&D spending will be amortized over 15 years for a US buyer but expensed immediately by a foreign competitor, the American bidder's after-tax valuation of that target is structurally lower—and it may lose the deal. The Semiconductor Industry Association notes that US chip firms face this disadvantage when competing globally for innovative assets, and the report suggests the same applies to M&A-heavy industries like pharmaceuticals. The United States should move toward neutral tax treatment of R&D regardless of location, the authors conclude, arguing that the current approach is more likely to shrink total US innovation than boost domestic activity. Penalizing foreign R&D won't bring research home—it'll just leave less of it under US control.