In October 2016, the U.S Department of the Treasury released Bulletin: 2016-42 (T.D. 9786). Specifically, new regulations provide more clarity regarding the definition of Internal Use Software (IUS), thus making more software development initiatives eligible for the Research and Development (R&D) Tax Credit.
This regulation potentially benefits business in a wide range of industries that are creating or improving software systems to support their businesses.
General and administrative functions that may qualify for the credit as IUS are:
- Financial management functions of the taxpayer and the supporting record keeping.
- Human resource management functions that manage the taxpayer’s workforce.
- Support services functions that support the day-to- day operations of the taxpayer.
In addition to the standard four-part test and the risk and rights requirements, the above general and administrative functions are subject to an additional 3-part high threshold of innovation test:
- The software would result in a cost reduction, improvement in speed or other measurable
improvement that is substantial and economically significant.
- The software development process involves significant economic risk. This means that the
taxpayer commits substantial resources to the development and there is uncertainty due to
technical risk that the resources would not be recovered within a reasonable period of time.
- The software is not available in the commercial market to be purchased, leased or licensed and
used for the intended purpose without modifications required to satisfy the innovation and
significant economic risk requirements above.
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.
Does all this seem a bit confusing to you? Not sure where to start? We are here to help.