--- title: 7 Qualifying Phases of Software Development for R&D Tax Credits description: Commercial software developers know the Software Development Life Cycle (SDLC) but may not be aware that activities during all 7 phases qualify for R&D Tax Credits. image: https://www.blacklinegrp.com/hubfs/AdobeStock_108306672.jpeg --- [![BLG Logo New](https://www.blacklinegrp.com/hubfs/New%20Logos/BLG%20Logo%20New.svg "BLG Logo New")](https://www.blacklinegrp.com/)   Questions? **[Call 763-746-1291](tel:17637461291)** - Services - [R&D Tax Credit](https://www.blacklinegrp.com/the-rd-tax-credit-black-line-group) - [How We Help Your Business](https://www.blacklinegrp.com/how-we-help) - [The BLG Way](https://www.blacklinegrp.com/the-blg-way) - [FAQs](https://www.blacklinegrp.com/faqs) - [Who We Help - CPA & Businesses](https://www.blacklinegrp.com/who-we-help) - [Industries We Serve](https://www.blacklinegrp.com/industry-brochures) - [Case Studies](https://www.blacklinegrp.com/case-studies) - [Employee Retention Credit "ERC"](https://www.blacklinegrp.com/employee-retention-credit) - [Cost Segregation](https://www.blacklinegrp.com/cost-segregation) - [Sales and Use Tax](https://www.blacklinegrp.com/sales-and-use-tax) - [About Us](https://www.blacklinegrp.com/about-us-black-line-group) - [Blog](https://www.blacklinegrp.com/blog) - [Contact](https://www.blacklinegrp.com/contact-us) [![GET STARTED ❯](https://no-cache.hubspot.com/cta/default/4260083/72b155c4-e6f5-4b0d-af1b-94df969aacfc.png)](https://cta-redirect.hubspot.com/cta/redirect/4260083/72b155c4-e6f5-4b0d-af1b-94df969aacfc) - Share - - - - - [mailto:?body=https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software](mailto:?body=https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software) # R&D Tax Credit for Software: 7 Qualifying Phases [Peter Harrington](https://www.blacklinegrp.com/blog/author/peter-harrington) Jan 20, 2021 - Share: - - - - - - [mailto:?body=https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software](mailto:?body=https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software) ![r&d tax credit for new software](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_108306672.jpeg?width=300&name=AdobeStock_108306672.jpeg) **A quick note before we get started**: The scope of this article relates to commercial software vendors who license the use of their software to end users. The development of software for a [company's own internal use](https://www.blacklinegrp.com/blog/internal-use-software-rd-tax-credit) is not covered. To learn about other forms of software use that qualify for the R&D Tax Credit, read this article: [R&D Tax Credit Qualification: Understanding Software Innovation](https://www.blacklinegrp.com/blog/software-innovation). When you hear the term “Research and Development Tax Credit” or “R&D Tax Credit,” you may think of cleanrooms and white lab coats. Yet, the R&D Tax Credit actually [applies to a wide variety of industries](https://tracking.cirrusinsight.com/59c751c8-a743-4c2f-b194-3ce42c86f276/blacklinegrp-com-blog-rd-tax-credit-industries), which includes supporting continued innovation in the software industry. Developing new software and R&D go hand-in-hand; you can’t have the former without the latter. So naturally, there are bound to be **qualified research expenses** for the R&D Tax Credit if your company is developing (or has recently developed) new or improved software. **There are 7 qualifying phases when claiming R&D Tax Credits for software development:** 1. [Planning](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#planning) 2. [Requirements & Analysis](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#analysis) 3. [Systems Design](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#design) 4. [Development & Coding](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#development) 5. [Testing & Integration](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#testing) 6. [Implementation](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#implementation) 7. [Operations, Maintenance, and Enhancements](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#maintenance) These qualifying phases match up with the **Software Development Life Cycle** (SDLC). Let’s explore how each phase has activities you need to pay attention to. ## 1. Planning ![software planning](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_210409153.jpeg?width=300&name=AdobeStock_210409153.jpeg)The first step is to **define the scope** of the problem and determine potential solutions. An organization identifies whether or not new software is required to **solve a business problem** in the market. Then, confirm general requirements (cost, time, resources, benefits) and estimate the **potential ROI** to determine if viable solutions exist. The planning phase answers these typical questions (among others): - What approach should we take to solve the identified business problem? - What are the primary capabilities, functions and features? - What benefits will the users receive? - What resources are required? - Does this give us a unique competitive advantage? - Will this help prevent competitors from entering the market? [Learn more about how the Planning phase qualifies for the R&D Tax Credit.](https://www.blacklinegrp.com/blog/software-project-planning) [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top)   ## 2. Requirements and Analysis ## ![software requirements & analysis](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_102205126.jpeg?width=300&name=AdobeStock_102205126.jpeg) A software company now moves on to [detailed information/requirements gathering and analysis](https://www.blacklinegrp.com/blog/software-requirements-analysis); analyzing the needs of end users to ensure the systems being considered meet their expectations. The goals of this step: confirm the business needs, determine how those needs will be met, identify who will be responsible for each piece of the project, and establish timelines and budget. These activities related to gathering requirements and analysis likely qualify as R&D: - Gathering Detailed Information - Defining Requirements - Prioritizing Requirements. - Developing User-Interface (UI) Dialogs - Defining Functional Requirements [Learn more about qualifying software requirements and analysis activities.](https://www.blacklinegrp.com/blog/software-requirements-analysis) [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) ## 3. Systems Design ![software systems design](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_254386462.jpeg?width=423&name=AdobeStock_254386462.jpeg) End users will now define their **detailed business requirements** for the proposed system, which should include the necessary specs, functions, features, and operational requirements. **Considerations** include the essential hardware and/or software components, structure (networking/cloud capabilities), processes, and procedures that allows the system to meet its objectives. Here are some qualifying activities involved in the design phase: - Developing logical and physical designs. - Producing meta-data, data dictionaries and data flow charts. - Evaluating and deciding on programming languages, databases, hosting environments and security infrastructure. [Learn more about systems design qualifies for the R&D Tax Credit.](https://www.blacklinegrp.com/blog/software-systems-design) [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) ## 4. Development and Coding ![software development and coding](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_167160211.jpeg?width=300&name=AdobeStock_167160211.jpeg)Work begins in earnest during this step as programmers, network engineers, database developers, and others begin **executing** to create the project deliverables. This phase typically involves translating developed requirements and specifications into code within the **required technical environment**, ensuring user and business needs are met. In addition to core development/coding, here are other activities that are usually considered qualified research expenses: - Developing and documenting test and user acceptance criteria - Iterative process of testing and updating code to achieve the desired result - Technical, environmental, system and program documentation - Supervisors' / managers' time involved in leading, directing and coaching the staff performing qualifying activities A specific example of an activity that *does not* qualify is development of user/help documentation that may occur during this phase. [Learn more about how Software Developing & Coding qualifies for the R&D Tax Credit.](https://www.blacklinegrp.com/blog/software-development-process) [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) ## 5. Testing and Integration ![software testing & integration](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_206382018.jpeg?width=281&name=AdobeStock_206382018.jpeg)A quality assurance (QA) professional now follows up with **additional tests** to check for errors, bugs, interoperability, and to determine if the proposed design meets the documented business goals. **Verification** and **validation** are also performed by end users to ensure the software’s operational readiness. Testing could result in the need for additional R&D to resolve any identified defects. **Specific activities that could qualify include:** - Developing a testing plan, strategy, and process for implementation - Designing test cases - Building test cases - Executing test cases - Documenting and analyzing results - Correcting any identified defects - Repeating the process until all defects are eliminated [Learn more about how software testing qualifies for the R&D Tax Credit.](https://www.blacklinegrp.com/blog/software-testing-rd-tax-credit)   [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) ## 6. Implementation ![software implementation](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_234092554%20(1).jpeg?width=300&name=AdobeStock_234092554%20(1).jpeg)Next, programs are put into **production**, which may be a **complex** undertaking based on how significant the impact of the new software is on the operation as it relates to data migration, system integration, cut-over processes and procedures, user and operational training, etc. Companies should carefully document all activities in order to determine the activities that qualify and to receive the biggest benefit. Many activities involved in getting programs and environments ready for implementation/production qualify for the R&D Tax Credit: - Environment set-up - Data conversion - Code deployment - Security - Monitoring and maintenance utilities [Learn more about qualifying software implementation activities.](https://www.blacklinegrp.com/blog/software-requirements-analysis)   [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) ## 7. Operations, Maintenance, and Enhancements ![AdobeStock_108306880](https://www.blacklinegrp.com/hs-fs/hubfs/AdobeStock_108306880.jpeg?width=330&name=AdobeStock_108306880.jpeg)The final iterative step improves and **fine-tunes** the system to enhance performance, add new capabilities, or meet additional user requirements. Depending on the scope of the work, the process may begin again at step one or any of the other six steps. Activities that usually qualify are **enhancements** or **improvements** made over time to meet evolving customer needs. It’s important to think in terms of “enhancements” versus “maintenance.” These ongoing activities would NOT qualify: - Routine post-production support - On-going technical updates - Bug fixes - Cosmetic changes - Developing user documentation [Learn more about the Software Maintenance step of the SDLC and how it qualifies for the R&D Tax Credit.](https://www.blacklinegrp.com/blog/software-maintenance) [Back to top](https://www.blacklinegrp.com/blog/rd-tax-credit-for-new-software#top) As you can see, **every phase** of the SDLC involves research and development. It’s also important to note that many of the phases include points where your business may have to stop and start over if the identified solutions aren’t working. This could **add even more activities** that could qualify for the R&D Tax Credit. Lastly, once you’ve identified potential qualifying activities, [run it through the Four-Part Test](https://www.blacklinegrp.com/blog/four-part-test-software-industry) to verify. Applying for the R&D Tax Credit isn’t incredibly difficult, but it can be a complex process. Consult with a professional and set up a free assessment by [completing the form on this page](https://www.blacklinegrp.com/assessment?hsCtaTracking=45dca7d7-b0d0-431d-bf85-ed4858503f28%7C9aa2f434-d890-4f6d-997b-6b78127665a2). 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