Hi, I’m CPA Maximiliano Mira Salas. In this new edition of our weekly newsletter, we address a key update regarding the tax treatment of Research and Development (R&D) expenses in the United States — and its direct impact on software factories with teams abroad.

📎 Technical Context and Regulatory Developments

R&D expenses — including functionality development, improvements, prototyping, and testing — have historically been central to the software industry.

Up to 2024 (under the TCJA): All R&D expenses had to be capitalized and amortized:

5 years for domestic expenses (U.S.)
15 years for offshore expenses

Starting in 2025 (under Section 174A):

Domestic expenses → immediately deductible (with an option to amortize)
Foreign expenses → must continue to be amortized over 15 years, with no access to R&D tax credits (§41)

This amendment raised concerns: many software factories feared becoming less attractive to U.S. clients, since development expenses with offshore teams would no longer be fully deductible.

📋 Brief Summary of Section 174A Introduced in 2025

Section 174A introduces partial relief compared to the previous mandatory capitalization rule: it allows R&D expenses incurred within the U.S. to be deducted in the same fiscal year. However, it maintains a more restrictive treatment for work performed outside the U.S., which must still be amortized over 15 years and does not grant access to related tax credits.

In practice, this reinforces the gap between hiring onshore vs. offshore teams and directly influences the structuring decisions of internationally based software factories.

📝 Current Interpretation: Active IRS Notices

Although the IRS has not yet issued final regulations, two official notices currently serve as practical guidance:

IRS Notice 2023-63
IRS Notice 2024-12

According to these documents — and R&D tax credit specialists — the following applies:

In Time & Materials (T&M) contracts, the economic risk and development rights remain with the client.
Therefore, the software factory is not directly subject to Section 174 requirements.
Even if the work is performed by offshore teams, clients may still fully deduct the expense when contracting through a U.S.-established entity.

📆 2025 Tax Season: Don’t Wait Until the Last Minute!

The upcoming tax season is approaching, and early preparation is key to optimizing deductions and avoiding penalties. If your company carries out R&D activities, now is the time to review your accounting records and assess the impact of Section 174A before year-end.

Schedule your pre-season review with FINANCERS and ensure an efficient and compliant tax process.

📌 Legal and Accounting Disclaimer

This communication is for informational purposes only and does not constitute legal, accounting, or tax advice. Each situation must be individually evaluated by a licensed professional, considering the entity structure, country of tax residence, and applicable international treaties.

Do you operate a software factory or development team abroad with U.S. clients? At FINANCERS, we advise on the most efficient accounting and tax framework, the application of Section 174A, and the optimal entity structure to maximize benefits and reduce risks.

CPA Maximiliano Mira Salas
International Tax Advisor | FINANCERS 🇦🇷🇺🇸