Software and technology companies perform qualified research activities (QRAs) on a daily basis, making them eligible to claim the Research and Development (R&D) Tax Credit. These companies conduct enormous amount of R&D activities, which makes them one of the strongest contenders for this valuable tax incentive. The software and technology company’s products or services don’t need to be groundbreaking, they will be eligible to claim the R&D tax credit if they make any advancement in their particular field of work. As long as the company has tried, failed or successfully designed or developed any new or improved products, process or technologies then they’ll be a solid candidate for the tax credit.
The list below details several QRAs conducted by the software and technology industry that can be claimed for the R&D Tax Credit:
- Testing and programming software source code.
- Designing, developing and testing new or improved technologies.
- Evaluating and designing software programs.
- Creating cost and time efficiency software for the following industries: accounting, financial, asset management, logistics, document management, educational, marketing, healthcare, etc.
- Testing a software’s unit integration, functionality and performance.
It is very important to note that when dealing with a company’s internal use software, a tax credit specialist needs to take into account the IRS’ special rules for this type of product. In early 2015, the IRS released a new set of regulations that determine what qualifies as internal-use software for the R&D Tax Credit filing purposes. The regulations state that the software needs to first pass the IRS Four-Part Test to deem the activity a Qualified Research Expense (QRE).
An internal-use software also has to pass a three step High Threshold of Innovation test. First, the software must be innovative. The software must be unique or novel and result in a reduction in cost or an improvement in speed that is substantial and economically significant. Second, the software development bears significant economic risk. The taxpayer commits substantial resources to software development and, due to technical risk, there is substantial uncertainty it will recover the resources in a reasonable time period. Third, the software isn’t commercially available. A third party can’t buy, lease or license the software.
Does your company perform any of the activities stated above? Think your company’s internal software meets these requirements? Send us an email at firstname.lastname@example.org or visit our website for more information on how we can increase your company’s market value and boost its bottom line through the Research and Development Tax Credit.