Development of Internal Software Tools May Be Eligible for Tax Credits

The U.S. tax code offers federal tax credits for expenses involved in developing or improving products or processes. This may include the development of software to be used for internal business or operational processes. These tax credits are a dollar-for-dollar reduction of taxes generated from the business income to which the expenses relate.

If you are developing custom software or applications that:

• Are intended to improve the efficiency or effectiveness of your business or operations or to improve the interface for customers.
• Are developed using a systematic framework such as Agile, DevOps, or Shape Up.
• Are not otherwise commercially available.

Many costs associated with those development activities may be eligible for the Research and Development Tax Credit.

These costs include, but may not be limited to:

• Internal labor costs related to concept development and scoping, coding, and testing prior to software viability, as well as direct management and support of these activities.
• Hardware purchased specifically for use in developing or operating the software.
• External labor costs related to software development or coding (primarily U.S. based, but offshore can also qualify in select situations).
• Server or cloud hosting services specifically intended for use in developing or operating the software.

Overall, these credits could total 6%-8% of these qualified costs.

They can be claimed for any open tax year (generally any return within three years of filing date), and in some cases closed years as well.

Eligible small businesses have the opportunity to apply these credits toward their payroll tax obligations, and any unused credits can be carried forward for 20 years, or until a change in company ownership.

Our research and development tax credit specialists have assisted clients across multiple industries in learning more about the credit, qualifying for the credit and maximizing their return. Companies could be leaving money on the table by not considering the research and development tax credit as a tax savings strategy.

A successful research and development tax credit claim could result in a large tax savings for activities that your business already performs.