Even though the definition of “Internal Use Software (IUS)” was more clearly defined nearly four years ago (October 2016, U.S. Department of the Treasury), confusion remains regarding what software development initiatives are eligible for the R&D Tax Credit.
Initially, the new regulations were a boon for commercial software vendors, yet companies from a variety of industries (you don’t need to be a commercial software vendor!) can take advantage, too. In fact, nearly any time spent improving upon or building Internal Use Software can count as qualified activities for the R&D Tax Credit.
In this article, we’ll answer the following common questions regarding IUS:
As previously mentioned, 2016’s Treasury Decision 9786 was intended to help clarify the many issues relating to Internal Use Software (IUS); specifically, which research activities qualify for the R&D Tax Credit.
The IRS now considers these to be IUS:
So software developed for the delivery of service — providing an application for customers to look up financial information at a bank/brokerage firm, purchase a product online, check the status of an order, or accept customer payments — can now be included in the R&D Tax Credit.
This is important! Don’t disqualify yourself because your company doesn’t market software to third parties.
Still with us? Good. As it applies to the R&D Tax Credit, there are several forms of IUS that could qualify. Here are the qualifying functions:
Another form of IUS that qualifies for the R&D Tax Credit is Dual Use Software. Simply put, Dual Use Software is software that helps organizations not only internally but their customers as well.
One example of Dual Use Software is banking 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 be marketed to third parties.
Now that you know what types of software qualifies as IUS as far as the R&D Tax Credit is concerned, it’s time to explain just what activities qualify for the R&D Tax Credit. In the case of IUS, it comes down to the time spent either A) creating IUS or B) improving IUS.
If you’re building proprietary software for internal use, there are many qualifying activities. This process typically involves gathering requirements and translating those requirements and specifications into code within the required technical environment to ensure the user and business needs are met.
After the coding, quality assurance and testing are conducted. In addition to all the core technical, development, and coding related activities, there are other activities that usually qualify:
We’re often asked, “Can I include the cost of my CAD software subscriptions in R&D?” In order for purchased software to qualify for the R&D Tax Credit as IUS, your company must have spent time and other resources making modifications or improvements to it to suit your organization’s needs. It can’t have just been bought and used as is.
With that in mind, the same types of activities qualify for improving IUS as they do for creating IUS.
Why wait? Find out if your business qualifies for the R&D Tax Credit today!
Have you been spending time improving or creating software that you think could be defined as IUS? There are two tests — the 3-Part High Threshold of Innovation Test and the Four-Part Test — to help you confirm if Internal Use Software qualifies for the R&D Tax Credit.
As you’ve seen, understanding how Internal Use Software applies to the R&D Tax Credit can mean more money for your business. Some have found millions of dollars in the form of R&D Tax Credits due to activities related to IUS development and enhancement. Yet, getting started can seem like the toughest part.
At Black Line Group, we’ve helped many businesses like yours. The time spent by your staff working with us often translates to thousands of tax dollars saved for every hour the team invests. You may be surprised to learn what we could find in your business.