Tax Incentives Blog

Five Ways to Recover Software Development Expenses with R&D Tax Credits

Written by Darren Labrie. Updated Apr 24, 2019.

RD_SoftwareDealsHave you ever known a fervent coupon clipper or a devout sale-shopper? They snatch up copious amounts of merchandise in single outings, free of personal spending-limit guilt. They know once the sales are tallied and the discounts deducted, they’ve comparatively ‘saved’ cart loads of cash with their deal-seeking dedication. They can frequently be heard proclaiming that anyone can buy and save big, you just need to know how to find the deals.

Companies developing software can benefit from emulating the sale-shopper mentality. For quality research and development (R&D) – and in the end a quality product – money must be spent. But if you know “how to find the deals” – in the form of tax credits, businesses can recover a nice portion of the R&D-related costs.

Learn More about Capturing R&D Tax Credits for Internal-Use Software

Here are five often overlooked ways for businesses to save money on software development expenses by capturing R&D tax credits.

R&D Tax Credits for Software Development

1.  Research is Time Well Spent
And well credited. The IRS permits you to claim the time devoted to research and development for software. Calculate the time employees contribute to R&D activities to maximize your tax savings.

Some of the qualifying development activities include:
  • Developing code for new software architecture or algorithms
  • Developing flexible, high-quality, and scalable rule engines to manage and automate complex business structures and models
  • Developing functional enhancements and new capabilities for existing applications, designed to create a competitive advantage
  • Developing interactive software to support the delivery of multimedia entertainment, such as streaming music or video or Internet video games
  • Developing specialized technologies, such as artificial intelligence or voice recognition applications
2.  Paying Employees Pays Off
Developing software requires resources, namely employees to perform the above tasks in research and development. Employees are an investment. But you can reclaim some of that expense – 100 percent of wages for the year - if any employee devotes 80 percent or more of his or her time to R&D.

3.  Your Support Gets Credit
Often companies claim credits for only core software engineers. Yet software development demands a variety of support personnel. The IRS allows organizations to capture software tax credits for staff who perform “direct research,” “direct supervision,” and “direct support” activities.

4.  Tall Savings for High-Level Wages
Executives’ time for R&D activities is often overlooked within the R&D Tax Credit calculation since many companies see these functions as only a small portion of execs’ daily tasks. However, since they are involved in complex R&D problem-solving activities, such as critical decision-making meetings, high-level wages for executives can qualify for software development tax credit.

5.  Internal Credits for Outsiders
Internal wage expenses are not the only eligible R&D tax credit claims surrounding software development. Businesses can claim 65% of third-party consultants and contractor wages for qualified research activities, as well. Internal Revenue Code (IRC) 41(b)(30(A) defines accepted contractor research as any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer).

This is a real boon for software companies who often rely on outside expertise for substantial portions of their development needs.

Recover Your Costs

Any bit of recouped expenses benefits your bottom line. A credit here, a credit there…all adds up to significant savings. You just have to know where to look.

Partner with CTI’s expert team of attorneys, CPAs, engineers, and scientists to steer you through credit complexities and claim all potential R&D tax credits for your software development.



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Topics: R&D Tax Credit

Darren Labrie

Written by Darren Labrie

Darren brings more than 20 years of experience in tax credits and business incentives. In his current role, he focuses on the overall operations of the practice and ensuring the highest level of service to clients.

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