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 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 to Software Development
According to IRS guidelines, a simple four-part examination can help decide which activities classify as qualified research.
- 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).
- Technical Uncertainty – Applies if the company’s available knowledge and information is insufficient or lacks the depth to meet the software’s criteria and specifications
- 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.
- Technological in Nature – The operations that were performed throughout the development process is based on a scientific discipline such as chemistry, biology, engineering, or computer science, the latter being the foundation of software development.
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 software development operations and see how your company could benefit.
