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 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.
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, 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:
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.
The planning phase answers these typical questions (among others):
Learn more about how the Planning phase qualifies for the R&D Tax Credit.
A software company now moves on to detailed information/requirements gathering and 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:
Learn more about qualifying software requirements and analysis activities.
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:
Learn more about systems design qualifies for the R&D Tax Credit.
Back to topIn addition to core development/coding, here are other activities that are usually considered qualified research expenses:
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.
Back to topSpecific activities that could qualify include:
Learn more about how software testing qualifies for the R&D Tax Credit.
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Many activities involved in getting programs and environments ready for implementation/production qualify for the R&D Tax Credit:
Learn more about qualifying software implementation activities.
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It’s important to think in terms of “enhancements” versus “maintenance.” These ongoing activities would NOT qualify:
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 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.
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