When one looks at the day-to-day activities of firms working in the IT or software development space, it is clear that the R&D Tax Credit has broad application. Most technology firms invest time and money each year towards either developing new technology or features or improving upon existing products. Both of these initiatives meet the permitted purpose test of the R&D Tax Credit.
The systems and processes utilized by modern technology companies often help substantiate the fact that developing software across various technology sectors requires experimentation. Methodologies like Agile, Scrum, and Waterfall generally require companies to test various alternatives in order to arrive at an optimal solution and, thus, satisfy many of the R&D requirements.
Companies engaging in software development activities can claim the following expenses towards the R&D Tax Credit:
• Wages of personnel associated with direct software development, support of development, and supervision of development, including:
– Software Engineers
– Project Managers
– QA Engineers
– DevOps Engineers
– Testing Support
– Technical Writers or Stakeholders
• 65% of US-based subcontractors associated with qualified development or testing
• Cloud expenses associated with development and testing servers’ environments
Various technology development projects across many sectors may constitute qualified research, including, but not limited to:
• Enterprise Software Development
• Web Application Development
• Internet of Things
• Machine Learning/Artificial Intelligence
• Certain Government Contracted Development
• SaaS Architecture Development
• Mobile Application Development
• Medical Imaging
• Memory Management
It is important to remember that a company does not need to be inventing or discovering new technology to be eligible for this credit. In general, projects that require the development of new architecture, algorithms, database management systems, and proprietary source code will pass the four part test of IRC Section 41. These include new products and improvements to existing products.
If you would like a free analysis of the R&D Tax Credit potential available for your software development work, please visit our R&D Tax Credit Estimator or contact one of the professionals at Diligentiam.
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