What software development activities and expenditures can be included in an R&D Tax Credit claim for software projects?
Companies performing qualified research in creating or improving their software may qualify for federal and state R&D tax credits for the software development activities they are already conducting. These credits are a dollar-for-dollar reduction in federal and state tax liability and could range from 6.5 percent to 15 percent of total research expenses. For example, a company employing 10 software engineers with qualified wages of $1 million could see federal and state R&D credits exceeding $100,000 for a single tax year. Below is a short list of qualified activities and the expenses eligible for the credits.
In terms of qualifying tasks, the following activities would be considered eligible for the R&D tax credit:
- Develop new, improved or specialized technologies
- Software developed as part of a hardware product
- Design and develop software architecture
- Develop new algorithms
- Design new database management techniques
- Develop system software, operating systems and compilers
- Establish functional relationships between software modules
- Program and test software source code
- Conduct unit, integration, functional, performance, and regression testing
- Develop feature enhancements
- Conduct analysis for new functional software end requirements, domain, software elements, or scope analysis for a new functional software enhancement
- Evaluate and establish functional specifications
- Improving internal processes
- Attending technical meetings
What R&D expenditures can be claimed for software projects?
For qualified research conducted in the United States, the main costs that can be claimed towards the R&D credit1 are:
- Wages paid to software engineers, programmers, developers as well as those supporting or supervising the development
- Agency workers
- Cloud license for use in developing software and conducting experiments to validate its design
- Right to use (time-sharing) computers
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Author: Tetyana Guguchkina
1Treas. Reg. § 1.41-2 Qualified Research Expenses.