Many have seen renderings of rockets bound for Mars and habitable space stations positioned at the edge of the solar system. Today those renderings are less fantasy and becoming closer to reality. Venture and corporate capital are already funding orbital compute power, in‑space manufacturing, and resource extraction. Leading entrepreneurs have publicly signaled a race toward orbital data centers with established players and startups alike preparing first nodes in 2026. In addition, feasibility work suggests launch costs could be economically viable for space‑based infrastructure within the next ten years.
Here’s the problem: from depreciation rules to deductions for R&D expenses, the general U.S. tax framework — federal and state — presumes that business assets and activities occur within identifiable U.S. or foreign territories. In other words, everything occurs on this planet. No federal or state tax codes were crafted for facilities that orbit Earth, cross over jurisdictions in hours, and deliver services globally from a location that is, by design, outside any specific state’s borders. For companies planning multi‑year orbital deployments, these ambiguities are not academic. They alter near‑term deduction timing, cash tax forecasts, and project internal rates of return (IRRs) and can compound into significant variances over the life of a program.
This article highlights five critical tax questions applicable to space innovation projects that the current U.S. federal and state tax codes are yet to address. These are issues that space companies should factor into investment cases and policy engagement planning now. There remain significant unanswered questions regarding the application of tax laws to space innovation projects. But understanding the gaps that exist within current law and where further clarity is needed can help executives, advisors, and policymakers work through ambiguity to allow for innovation.
1. Bonus Depreciation vs. ADS: Is Orbit ‘In’ or ‘Outside’ the U.S.?
How a company finances a build often depends on whether it can write off the cost up front or only over time, because that choice changes near-term cash taxes and free cash flow. Under the One Big Beautiful Bill Act (OBBBA), the applicable bonus depreciation percentage under Section 168(k) of the Internal Revenue Code is 100% for qualifying property acquired and placed in service after January 19, 2025. However, property used predominantly outside the United States generally does not qualify for bonus depreciation and must also be recovered using the alternative depreciation system (ADS). Property subject to ADS is depreciated on a straight-line basis over a longer recovery period as compared to the general depreciation system (GDS). Whether an orbital facility is treated as U.S. property or “outside the U.S.” could potentially be the difference in tens of millions in year‑one deductions for a single orbital facility.
- When a data center, communications array, or in‑space manufacturing asset is placed in low‑Earth orbit, is it treated as U.S. property for Section 168(k) or “outside the U.S.” triggering ADS?
- Does launch origin, U.S. licensing (e.g., FCC), ground control location, or customer base influence tax geography for depreciation eligibility?
The difference between bonus depreciation vs. ADS can reshape cash tax and free cash flow in the first decade of operations, which are material to financing terms and shareholder communication and ultimately determine which projects go and which projects don’t.
2. Upfront Deposits and Long Dwell Times: Income Now or Later?
Orbital projects often secure large customer deposits for launch slots, reserved compute capacity, or other technological commitments years before delivery. Financial reporting (ASC 606) often treats these deposits as deferred revenue until performance obligations are met. However, tax accounting under Section 451 generally taxes advance payments when received, with only limited one‑year deferral for accrual-method taxpayers. For profitable operators, deferral is paramount to cash preservation. For startups carrying significant net operating losses (NOLs), accelerating income can sometimes be strategic (e.g., before a funding round that triggers a Section 382 ownership change, which limits NOL usage).
- Can long‑duration space contracts access deferral beyond one year, aligning tax treatment with actual performance timelines?
- How should companies weigh income acceleration vs. NOL preservation in light of potential Section 382 limits after funding rounds or strategic investments?
A $50 million deposit could drive a $10–15 million difference in current‑year tax payments depending on timing—directly affecting runway, capital expenditure pacing, and balance‑sheet optics.
3. Section 174 R&D Capitalization: Where Does ‘Development’ End and ‘Deployment’ Begin?
Space programs often blur the lines between experimentation, scaled manufacturing, and deployment, and the domestic/foreign boundary can be especially hard to map when work is controlled from the U.S. but executed elsewhere (including in orbit). Under the OBBBA framework, domestic research or experimental (R&E) costs generally fall under Section 174A, which permits immediate deduction (with optional capitalization/amortization elections), while foreign R&E remains subject to Section 174’s 15-year amortization rule.
A further complication: both Sections 174A and 174 exclude “exploration expenditures” incurred to ascertain the existence, location, extent, or quality of deposits of ore or other minerals (including oil and gas). If an asteroid or lunar resource program is characterized as mineral exploration, it may sit outside the R&E framework entirely, raising the question of whether terrestrial mining-style cost recovery rules (written for Earth-based deposits) are the closest analogue, or whether new guidance would be needed for off‑planet extraction.
- Which costs are (i) domestic R&E potentially deductible under Section 174A, (ii) foreign R&E amortized under Section 174 (15 years), (iii) ordinary operating expenses, or (iv) costs of depreciable property?
- Are any “asteroid/lunar mining” activities better viewed as excluded mineral “exploration expenditures,” meaning Section 174A/Section 174 may not apply at all?
For a company spending $200 million annually, classification can mean the difference of $30–40 million in annual deductions, which could cause taxpayers to pay cash tax earlier than planned or, conversely, increase the amount of an NOL to offset near‑term income.
4. Do Tax Credits Apply in Orbit?
Space firms perform precisely the activities government intends to incentivize—cutting‑edge R&D and advanced manufacturing.
Eligibility considerations: It is critical for companies involved in space development to thoroughly review all contracts related to their development activities. To claim potentially qualified expenditures under Section 41, companies must both retain the rights to the work produced and be financially at risk. Any work funded by a third party is not eligible. Space firms should carefully evaluate the work performed on each project or business component—including the location of the work, the associated costs, and any third‑party contractual arrangements—to determine whether the expenditures may qualify.
Start-up considerations: Eligible start‑up companies may elect to apply up to $500,000 per year of their R&D credit against payroll taxes. To qualify as a start‑up, a company must be within its first five years of incorporation, and its gross receipts must be under $5,000,000 for the taxable year. It is important for companies interested in this benefit to plan because the payroll tax credit election must be made by the due date of the originally filed income tax return (including extensions). The portion of the credit applied to payroll taxes becomes available in the first calendar quarter beginning after the qualified small business files its income tax return. Any remaining credit — after offsetting the employer share of Social Security and Medicare taxes — is carried forward to the next quarter.
State considerations: Many rules condition eligibility on U.S. geography or a physical location within a state. That raises new questions for R&D done by orbital platforms, 24/7 solar capture in space, and state credits tied to jobs and property “in‑state.”
For example, California offers a partial sales and use tax exemption for qualified persons engaged in manufacturing or research and development. The exemption explicitly requires that both the equipment purchase and the use occur within California. California sources qualified research expenses based on physical location: only expenses incurred while conducting qualified research within the state are eligible. If the qualified purchases are made in California, but the qualified research is performed in space, based on the letter of the law, these purchases would not qualify.
- If U.S. engineers design, control, and analyze experiments conducted in orbit, is the research “conducted in the United States”? What substantiation will satisfy auditors regarding location, supervision, and control?
- How do Section 41 credit positions align with our Section 174A/Section 174 classifications?
- Regarding state‑level incentives, which state—headquarters, ground control, launch, or none—claims the activity for R&D credits, sales/use exemptions, or job‑creation incentives when core production occurs outside any state’s borders?
- Even where activities are credit-worthy in principle, OBBBA-era eligibility, phaseouts, and foreign-entity restrictions can drive whether clean energy, clean fuel, or advanced manufacturing credits produce real value and whether those benefits can be monetized through transferability or direct pay regimes.
R&D credits can provide substantial benefits for companies involved in space development. These credits can offer direct tax savings equal to roughly 5–10% of qualifying R&D expenses. Eligible start‑up companies may also elect to apply up to $500,000 per year of their R&D credit against payroll taxes.
It is critical for companies to clearly understand the contracts governing their development activities, the types of expenditures incurred, the nature of the work performed, and where that work takes place. Strong documentation of the underlying activities and associated costs will enhance the credibility of the credit claim and reduce tax risk for the company.
5. How Will State Taxation Apply to the Final Frontier?
Post-Wayfair, the concept of economic nexus has fundamentally reshaped state tax obligations. Businesses can now be required to collect and remit sales tax based solely on revenue thresholds or transaction counts within a state, even if they lack a physical footprint. However, the traditional physical presence standard still exists in many contexts, creating a dual framework that complicates compliance. For companies operating in the space industry, this tension is particularly challenging because their assets are not confined to terrestrial borders.
When satellites and orbital infrastructure pass over every state daily, what does “physical presence” really mean? Is a fleeting presence in a state’s airspace enough to trigger nexus, or should nexus hinge on more tangible connections like ground stations, control centers, or customer operations? Even where nexus principles seem straightforward in theory, post-Wayfair thresholds, evolving sourcing rules, and state-by-state interpretations can determine whether orbital services trigger collection obligations and whether compliance strategies can mitigate cascading exposure across jurisdictions
To further complicate things, even if federal rules evolve to address orbital assets and activities, state conformity is far from automatic. While many states piggyback on the Internal Revenue Code for depreciation, R&D, and income sourcing, conformity is often selective and subject to decoupling. Some states adopt federal changes wholesale; others apply rolling conformity with carve-outs, and still others lock in static versions of the Code. For space operators, this means a single federal answer rarely cascades cleanly to state returns. A bonus depreciation fix for orbital property at the federal level could be ignored by states that have already decoupled from Section 168(k). Similarly, state treatment of Section 174 capitalization, credit eligibility, and apportionment rules may diverge sharply. Accordingly, compliance models must anticipate a patchwork of state positions and executives should press for clarity on whether states will conform or create bespoke rules for assets and services that orbit beyond any state’s borders.
- For income apportionment, should orbital property be excluded entirely, or assigned to a specific state (e.g., ground control or launch state)? How should sales be sourced for services delivered via laser links and ground stations serving nationwide customers?
- For sales/use tax on SaaS‑like orbital services, which jurisdiction applies (e.g., customer billing address, service delivery point, or customer operations location)?
Mis‑apportionment and sales tax errors can trigger audits, penalties, and double taxation. For scaled operators, exposure can easily reach seven or eight figures if states disagree on sourcing principles.
The Takeaway
The industry’s momentum toward orbital data centers and other space‑based infrastructure is real and near‑term. The tax code must evolve to support innovation without sacrificing policy integrity. Executives who put these questions on their agendas now, and who collaborate with advisors and policymakers, will shape the standards that govern the next generation of infrastructure. But companies can’t wait for perfect clarity, which will take time. They must plan around the current tax uncertainty in their decision-making. Trusted tax advisers can help companies develop a practical approach for dealing with the lack of clarity on these complex unresolved tax questions so that they can better avoid significant pitfalls in tax planning for the new frontier.
Our tax advisers can help your business navigate tax regulations, credits, and incentives with clarity. Contact us.