Analyzing and Interpreting the Regulations on Internal Use Software within the Research and Development Tax Credit
While many companies develop software for other companies, may companies also develop software for internal purpose. Similarly, companies may develop software that is partially used for internal purposes but also may have an external or customer facing purpose as well. What you may not know is that these developments may be able to obtain you benefits from the Research and Development Tax Credit.
Software has posed a problem for Congress and regulators for a long time. The tax code and laws struggle to evolve as rapidly as companies develop new and better types of software. For years, companies faced uncertainty regarding the qualification of internal use software towards the R&D Tax Credit. Now, regulators have given companies much desired certainty regarding the acceptability of internal use software as an eligible claim towards the R&D Tax Credit. Regulators have also provided much needed clarity on what actually constitutes internal use software. Typically, internal use software is software developed by a company for general and administrative purposes or non-computer services. Basically, internal use software is software developed by a company to satisfy some need in their business. To qualify for purposes of the research credit, the activities a company undertakes must satisfy the standard developmental requirements for the credit. In addition, activities related to the development of internal use software must also satisfy a higher threshold of innovation and involve a significant economic risk on the part of the company.