Download The Article

“Final Regulations Further Expand the R&D Tax Credit for Software Development”

About The Article:

Taxpayers, especially financial institutions, were pleasantly surprised in early 2015 when the Treasury/IRS issued proposed regulations, relating to the treatment of software development under the Section 41 Research Credit.

Although the proposed rules appeared very favorable, and would likely allow credit eligibility to most customer-facing type application development, some of the proposed provisions were likely to also  cause significant confusion not only for taxpayers but for the IRS as well—and thus certainly result in future tax controversy.

In this Spring 2017 Journal of Taxation article, Tax Credits Group President Michael Krajcer provides readers with an understanding of the final regulations issued on October 4, 2016, and how they have revised the proposed rules, making significant favorable changes and providing much greater clarity.

Armed with these regulations and a permanent credit, taxpayers conducting software development are now in a much better position to plan for and document research credit claims.

In this article, you will learn the following:

  • Why Internal-Use Software (IUS) has historically been subject to more stringent eligibility requirements.
  • What the ‘High Threshold of Innovation’ test is and why this eligibility requirement was so challenging for taxpayers developing IUS software to meet.
  • How final IUS regulations now provide taxpayers with clarity as to the definition of the three requirements that make up the high-threshold–of-innovation test, and the process-of-experimentation test that all soft­ware development is subject to.
  • How dual-function software will be addressed moving forward; (Both IUS and non-IUS software are being developed as part of an integrated system.)
  • Why financial institutions developing customer-facing software are sure to benefit from these final regulations.