Research Credit for Internal Use Software

The following is a summary of an important tax development that has occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Finalized regulations explain when research credit is available for internal use software. As a general rule, except as provided by regulations, the research tax credit is not available for computer software that is developed by (or for the benefit of) the taxpayer primarily for its internal use. New final regulations carry an exception by providing that the research tax credit is available for the development of internal use software that meets a “high threshold of innovation test”. Under this test, internal use software can qualify for the credit if it is innovative, the software development involves significant economic risk, and the software is not commercially available for use by the taxpayer. Under the final regulations, part of the cost of computer software that is developed for both internal use and non-internal use (dual function computer software) also may be eligible for the credit.

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