The Research and Development (R&D) tax credit is intended to incentivize companies to make innovative and technological investments that help the U.S. remain competitive in the global marketplace. Software development companies can take advantage of R&D tax credits in ways extending beyond traditional programming. The software being developed does not have to be groundbreaking to qualify; in fact, software development efforts in almost any industry and application have a very good chance of qualifying.
Background: R&D Tax Credits for the Software Industry
The R&D tax credit, one of the most significant domestic tax credits remaining under current tax law, is a substantial tool that can maximize a company’s cash flow and bottom line. Despite the fact that the R&D tax credit has been available since 1981, less than one-third of eligible companies recognize that they qualify for the credit.
Many software developers don’t realize the tax credits are available to them, or they don’t understand which activities qualify. The Tax Cuts and Jobs Act of 2017 retained the permanency of R&D credits, underscoring the importance of U.S. investments toward innovation. Additionally, two-thirds of U.S. states offer tax credits for R&D activities.
The R&D tax credit can reimburse software companies that develop new products, processes or inventions, or improve current processes and products. R&D tax credits can result in thousands of dollars back to the company for qualified research activities and research expenses, which can offset wages and salaries paid for qualified activities.
Software activities that qualify include:
- Concept development/design
- Requirement gathering/defining
- Design development of structural software architecture
- QA testing during project development (integration, functional, regression)
- Engineering/Software development
- Management of development
Software job titles of individuals typically performing R&D qualified activities include:
- Software Engineer/Developer/Architect
- Systems Analyst
- Network/Systems Administrator
- Web Developer/Analyst
- Project Manager
- QA Analyst/Tester
- Chief Technology Officer (CTO)
A simple four-part test helps to determine which activities constitute qualified research according to criteria established by the IRS. They include: permitted purpose; technological in nature; elimination of uncertainty; and process of experimentation.
Determine Your Eligibility for Software R&D Tax Credits
Many computer science companies are missing out on these valuable tax credits! Keep in mind that you do not need to be a large company to qualify for the R&D credit. ETS has helped companies of all sizes across the U.S. to identify these expenditures and receive the tax benefits they have been missing.
R&D Tax Credit Study
Claiming R&D tax credits requires a fair amount of documentation by the IRS. That’s why it’s important to seek professional help from a consultant with a strong expertise in helping software companies successfully claim these valuable tax credits. Our R&D experts dig much deeper into the fundamentals of your business activities to uncover more credits and provide the careful documentation necessary to support your activities.
Learn More About R&D Tax Credits for Software Companies
The R&D tax experts at Engineered Tax Services have helped companies of all sizes across the U.S. identify and qualify their expenditures and receive the tax benefits they have been missing. Our process begins with an R&D Tax Credit Qualification Analysis to make sure your company qualifies for the R&D tax credit.
To learn more about R&D tax credits for software companies, please complete the form on this page. For immediate questions about tax deductions for software companies, call Engineered Tax Services at (800) 236-6519 or check out our R&D tax credit page for more information.