For decades, the United States has been the global epicenter of innovation — home to the world’s most advanced research institutions, robust private sector R&D investment, and a thriving startup ecosystem. But a quiet policy shift is threatening that leadership.
A few years ago, federal research and development (R&D) tax incentives were slashed, causing a growing number of American companies — both established corporations and high-growth startups — to offshore their investments in people, intellectual property, and innovation assets. At a time when economic growth depends more than ever on technological advancement, the U.S. is risking a brain drain that could reverberate for decades.
The R&D Tax Credit Problem
The 2017 Tax Cuts and Jobs Act — better known as the “Trump tax cuts” — included a provision allowing companies to fully expense qualified R&D activities in the year they were incurred — a cash flow-friendly incentive for innovation. R&D investments are inherently risky, which is why the government offers tax incentives in the first place. The Trump tax cuts supercharged those incentives by allowing companies to claim them all at once, rather than spreading them out over many years.
Starting in 2022, however, the law began requiring companies to amortize R&D expenses over five years domestically and 15 years internationally. For the companies that drive innovation in America, this represented a de facto tax increase and a disincentive to invest in research projects domestically.
While lawmakers on both sides of the aisle have voiced support for restoring full expensing, legislative inaction has left businesses to adjust their strategies. And increasingly, that means shifting innovation to countries where the tax code is better aligned with 21st century competition.
Follow the Incentives
Across the globe, governments are rolling out the red carpet for innovation. The United Kingdom offers a generous, sometimes refundable, R&D credit. Canada provides substantial credits at both federal and provincial levels. Singapore and Ireland combine favorable R&D incentives with low corporate tax rates. Even Israel — despite its current geopolitical uncertainty — continues to draw investment with aggressive grants and R&D matching programs.
The contrast is stark: while the U.S. debates retroactive fixes to tax policy, our competitors are actively building innovation infrastructure.
Real Companies, Real Shifts
Several high-profile companies have already taken decisive steps to move R&D operations offshore in response to U.S. tax disincentives, taking advantage of opportunities to save billions of dollars by moving to countries with R&D tax regimes closer to what was originally created by the Trump tax cuts.
Ireland, in particular, has elevated the practice of luring foreign companies to its shores into an art form:
• Medtronic acquired Ireland-based Covidien in 2014 and shifted its corporate headquarters to Dublin, citing access to favorable tax treatment — including for R&D — as a primary factor.
• Eaton Corporation, following its $13 billion merger with Cooper Industries, moved its domicile to Ireland, leveraging lower tax rates and innovation incentives.
• Microsoft relocated $52.8 billion in intellectual property assets to Ireland in 2019, in part to benefit from favorable R&D-related tax treatments.
• Perrigo, the pharmaceutical manufacturer, acquired Irish firm Elan Corporation and restructured its operations to take advantage of more favorable foreign tax regimes.
Each move represents a quiet but powerful shift of high-value innovation overseas — jobs, intellectual property, and future revenue streams that could have been retained domestically with a more competitive tax policy.
The Ripple Effects
This offshoring trend has significant implications: fewer high-skilled jobs, a weakening domestic supply chain for advanced technologies, and a loss of commercialization opportunities. When R&D activities move offshore, so does the future economic value generated from them — patents, licensing revenue, and next-generation products that could have been made in America.
A Call for Reform
Restoring full expensing under Section 174 would be a start. So would increasing the Alternative Simplified Credit rate, expanding eligibility for refundable credits, and simplifying compliance burdens for small and mid-sized firms. The good news is that Congress is capable of adopting at least some of those strategies when it passes legislation this year to extend the Trump tax cuts.
But more fundamentally, the U.S. needs to reassert its commitment to innovation as a strategic national priority.
China spends more on R&D as a percentage of GDP than the U.S. The EU is catching up. Without bold action, the American innovation machine that fueled decades of global leadership may stall.
Policymakers still have time to course-correct — but the window is closing. If the goal is to retain talent, safeguard national competitiveness, and create the next wave of homegrown breakthroughs, the U.S. must treat R&D not as a tax line item, but as an investment in the country’s future.
Julio Gonzalez is the founder of Engineered Tax Services.
Join the conversation as a VIP Member