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Why the financial industry is sure to benefit from final Internal Use Software Regulations

Meeting eligibility requirements for the R&D Tax Credit just got a whole lot easier for businesses investing in customer-facing software development.

Last month, Treasury published TD 9786 which provided final regulations relating to Internal Use Software (IUS) and the resulting language proves to be both reasonable and favorable to taxpayers. As it relates to non-internal use software or what is often referred to as “customer-facing” software, final regulations state:

Software developed to be commercially sold, leased, licensed, or otherwise marketed to third parties; or (B) Software developed to enable a taxpayer to interact with third parties or to allow third parties to initiate functions or review data on the taxpayer’s system.

With the issuance of TD 9786, many banks, insurance companies and wealth management firms investing in the development of online customer portals will now be eligible to reap the benefits of this general business credit.

Prior Limitations:

As it relates to the federal research credit, since 1997, IUS has been considered software developed for general or administrative functions that would support a taxpayer’s trade or business. This is often thought of as “back-end” software a business of any industry would use for its day-to-day operations.   As for customer-facing software, regulations required this be software for sales, lease or license. The distinction between these two software classifications has been ever critical to taxpayers due to the eligibility requirements associated with each.

Any business claiming an R&D tax credit must meet four eligibility requirements known as the “Four-Part Test.” But, additional burden and scrutiny known as the “High Threshold of Innovation Test” has historically been placed on software considered to be internal-use. Hence, it’s always been easier for taxpayers to meet R&D tax credit eligibility requirements if their software project is considered to be customer-facing.  (Key Takeaway – Given the choice – you want your software project classified as non-IUS or customer-facing.)

So while companies developing and selling, leasing or licensing software solutions to customers were able to meet the standard eligibility requirements for the credit, businesses such as banks, insurance companies and wealth management firms working to develop unique and secure online customer portals that would not be sold, leased or licensed (but were also not intended for general or administrative functions) were faced with the additional burden of meeting the high threshold of innovation test – a bar that for many was too high to overcome.

New Opportunities:

Under the final regulations, businesses investing in the development of customer-facing software, regardless if it will be sold, leased or licensed to customers, will get the same opportunity as their industry counterparts who are selling, leasing or licensing their software to prove to the U.S. government that their software development efforts meet eligibility requirements.

For the many banks, insurance companies and wealth management firms who are developing and continually customizing their proprietary online portals to allow customers to access personal and historical account information and make real-time transactions in desktop and often mobile environments, these efforts are often enough to satisfy the basic requirements as governed by the regular 4-Part-Test.

To find out if your software development efforts will qualify for the R&D Tax Credit – be sure to contact us today at http://taxcreditsgroup.com/contact-us/ or give us a call at 440.331.0714.

Fall Tax Event

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