Global Tax Insights
Final Regulations: R&D Tax Credit for Internal Use SoftwareNovember 04, 2016
Has your company recently developed software for its own internal use? Find out if you can claim the Research and Development Tax Credit.
Wondering if the software your company has developed for its own internal use can qualify for the Research & Development (R&D) Credit? The IRS issued final regulations on October 4th which provide guidance on the qualification of Internal Use Software (IUS) for purposes of the Section 41 Credit for Increasing research Activities.
More about the final regulations
There is a four part test that helps determine qualified R&D activity.
The first test is called “Elimination of Uncertainty”.
Called the Section 174 test, this test involves creating a fully functional representation of the product or improved component of an existing product, to eliminate any uncertainty concerning the success of the development (to make sure the “development” isn’t solely an aesthetic change, for example).
The final regs change this test...
The IRS restored something called “appropriateness of design” as an uncertainty for IUS. This means that IUS research activities that involve uncertainty related to appropriate design of the new or improved product (and not capability or methodology) would rarely qualify as having significant uncertainty.
This is just one of the final IRS regulations. Read our article, “IRS Issues Final Regulations for Internal Use Software and the R&D Tax Credit” for a full explanation of the new regulations.