Software R+D Tax Credits: Are You Eligible?

Posted by Richard Daigle on Feb 21, 2017 8:30:00 AM
Richard Daigle
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Did you know that if your company has developed software for internal use, you may be eligible for tax credits? This fall, the IRS finalized a regulation that will allow taxpayers to receive credit for their investment in software research and development.

You might think that you need to develop software for a multi-billion dollar company to claim tax credits, but that's not necessarily the case. If your company is attempting to develop or improve your own software (or have hired someone to do so for you), you're likely to be eligible for tax benefits.

You may be eligible if:
  1. Your software has been developed only for your company's own internal use.
  2. More specifically, your software has been developed for use in General and Administrative (G+A) functions that support your business. G+A functions are limited to financial management, human resource management, and support services.
  3. Your software meets a three-part "High Threshold of Innovation" test:
    1. The software is considered "innovative", meaning that it results in a cost savings, improvement in speed, or other measurable improvement to your business.
    2. The development of the software involves significant economic risk.
    3. The software must not be commercially available at the time of development.
But not if:
  1. Your software is commercially sold, leased, licensed, or marketed to third parties.
  2. Your software is "dual function", meaning that it is used both in G+A and non-G+A capacities (although safe harbor regulations may still allow you to include a percentage of expenses toward tax credits).

Your CPA can determine if you qualify, and help you capture the full extent of tax credit. If you have any questions, I'm happy to help—leave a comment below, or contact me directly anytime.

Topics: Tax, Technology