R&D Tax Credit for Software Companies
Research and development (R&D) tax credits can make a significant difference to a company’s tax return, with the US government providing billions of dollars worth of credits annually. Despite the financial benefits, many software companies are not taking advantage of the credit, as they believe that their work does not qualify.
While this may have been the case in the past, changes to the PATH Act of 2015 expanded eligibility to include small and medium sized businesses who may not have previously qualified, allowing them to offset their regular and alternative minimum tax liabilities and use the credit against payroll taxes. Prior to these changes, many tech start-ups could not claim the credit as they were not yet profitable. The Startup Provision amendment acknowledged the fact that start-ups are some of the country’s most innovative companies. Further changes to the PATH Act also made the credit permanent, so that innovative companies could continue to invest in R&D with confidence.
Another incorrect assumption is that the software needs to be developed for commercial use. The R&D tax credit can be applicable to the development of improved internal business systems. Any applied science and technology that is used to solve a practical business problem can be considered qualified R&D. This means that the software should be new to the business, but does not need to be groundbreaking. Improvements to a program, new iterations, coding solutions and developing algorithms can be considered eligible activities. The work does however need to differ from existing software and there needs to be substantial financial risk if the project proves to be unsuccessful.
Finally, it is also possible to claim for paid work. For government contracts, eligibility will depend on the terms of the contract. For instance, the contract must state that the work will only be paid for if successful, otherwise there is no financial risk to the company for the research.
It is a good idea to consult a tax advisor to determine your eligibility. Contacting Swanson Reed R&D Tax Advisors for a free assessment is a fantastic first step. They will guide you through the process, taking away any uncertainty or stress in claiming the R&D tax credit.
