How Can Software Development Qualify for R&D Tax Credit?

by | Jun 1, 2022 | Software Development, Tax Credits

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The software industry is a hub of innovative research and development. Thousands of businesses claim R&D tax credits for their software development projects each year. But did you know that many companies in the field are still missing out on this beneficial tax credit? The R&D tax credit is designed to encourage innovation and software development companies can take advantage of this. 

If your company is involved in software development, there’s a great chance that you will benefit from the R&D tax incentives. 

How to determine your Software Development R&D Tax Credit eligibility?

Software companies that develop new products and processes, or improve existing processes and products, may be eligible for the R&D tax credit. The software being produced does not have to be new; in fact, software development projects in practically every industry have a great chance of qualifying.

Examples of qualifying activities include (Domestic Only):

  • Software engineering
  • Direct support time from testers
  • Founder’s direct supervision of the design effort
  • Time the foreign developers spend in the USA working with the domestic team
  • Front-end development and functional design of the user interface

While some non-qualified activities include:

  • Minor bug fixes not rising to the level of the four-part test
  • Pure aesthetic/marketing portions of the design effort
  • Founder time spent on the business aspects of the software

Applying the Four-Part Test

According to IRS guidelines, a simple four-part examination can help decide which activities classify as qualified research.

  1. Permitted Purpose – Requires the company to invest resources in designing and developing new software. Upgrades to software that add new features or capabilities are also usually considered qualifying research expenses (QREs).
  2. Elimination of Uncertainty – Applies if the company’s available knowledge and information is insufficient or lacks the depth to meet the software’s criteria and specifications
  3. Process of Experimentation – A significant portion of the company’s software development activity demonstrates an experimenting phase such as a series of trials and errors aimed at evaluating potential methods in order to attain the permitted purpose.
  4. Technological in Nature – The process of experimentation must rely on the hard sciences such as chemistry, biology, engineering, or computer science, the latter being the foundation of software development.

How can KPT Consulting help?

KPT Consulting already helped numerous IT and software companies with their R&D tax credit, and now it’s time for you to take advantage of this opportunity! Contact us today to discuss your operations and see how your company could benefit.

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