IUS is now defined as software that is developed by the taxpayer (your business) for general and administrative purposes such as financial management, human resources, and support services. The software must support the taxpayer’s business in one of these ways.
Black Line Group Chief Revenue Officer Peter Harrington has seen several instances of Dual Use Software qualifying for the R&D Tax Credit since the rule clarification, and notes that it’s relatively easy to identify this form of IUS based on its functionality. A good example is banking software (Harrington cited Bank of America’s online platform, but most large banks have similar proprietary software). These platforms were developed specifically to make it easier for customers to do business with their banks—moving money from one account to another, checking balances, depositing checks, etc. So while the software is not strictly internally facing, it’s also not developed to sell or market to third parties.
The same can be said for companies that develop and implement software to help customers place an order, check the status of their order, pay a vendor, or handle additional transactions between business and consumer. For example, think about software development needed for any business processing orders online for sales or services. This can range from major online retailers to small family-owned businesses. However, simply developing the software isn’t enough to qualify for the credit. Activities must pass both the Four-Part Test and the 3-Part High Threshold of Innovation Test.
Once you’ve identified potential qualifying activities, run it through the four-part test to verify. The four parts of the test are:
Once an activity has passed the 4-Part Test, the 3-Part High Threshold of Innovation Test will determine whether it will ultimately qualify for the R&D Tax Credit:
These regulations are designed to encourage companies in all industries to continue to invest in “software innovation” that allows them to compete more effectively on a global basis. Companies should review their software development initiatives to understand what might qualify for a tax credit, even if things didn’t qualify in the past.
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