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Internal-Use Software Development Eligible For R And D Tax Break

by Mike Godfrey, Tax-News.com, Washington

07 October 2016


The Internal Revenue Service (IRS) has published final regulations regarding the application of the US research and development (R&D) credit to computer software that is developed by a taxpayer primarily for internal use (internal use software).

Section 41(d)(4)(E) of the Internal Revenue Code provides that, except to the extent provided by regulations, research with respect to internal use software is excluded from the definition of qualified research for tax credit purposes.

However, in January last year, the Treasury Department and the IRS published a notice of proposed rulemaking under Section 41. After consideration of all of the subsequent comments received, the new final regulations largely adopt the proposed regulations.

The final regulations confirm that internal use software can be included, if the software is developed by the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer's trade or business. The software should provide a reduction in cost, or an improvement in business operations, that is "substantial and economically significant."

The regulations provide rules to evaluate whether software that has both back-office and front-office functions is developed primarily for internal use. The benefits that such software may provide to third parties should be "collateral and secondary." Internal use software cannot be developed to be commercially marketed to third parties.

TAGS: tax | business | law | tax credits | Internal Revenue Service (IRS) | tax authority | legislation | United States | regulation | research and development

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