R&D Tax Talk – Internal Use Software

R&D Tax Talk

In this episode of R&D Tax Talk, Nancy Imholte, Ryan Coleman and Monique Pham explore the intricacies of qualifying for the R&D tax credit when developing internal use software (IUS). IUS, designed for internal operations, must meet the higher threshold of innovation (HTI) test to qualify. This episode unpacks the three additional criteria that apply specifically to IUS, providing key insights for businesses navigating the R&D tax credit process.

Key Points:

• Internal use software must meet a higher threshold of innovation to qualify for the R&D tax credit.
• The software must provide substantial innovation, be economically risky and not be commercially available.
• Recent regulations allow for favorable treatment of software with third-party interaction components.

Imholte talks with Coleman and Pham about internal use software and the higher threshold of innovation test required for R&D tax credit eligibility. Coleman explains that IUS is software developed for internal business functions, such as managing finances or project management, must meet additional criteria beyond the standard four-part test for the R&D tax credit.

“The software must be innovative, meaning it leads to significant improvements, such as speed or efficiency,” Pham said. “It must also involve substantial economic risk, and it can’t be commercially available off the shelf.” Coleman added that regulations issued in 2016 allow for a more favorable treatment of software with third-party interaction, potentially exempting some IUS from the stricter HTI requirements.

Although these additional tests might appear deterrents, they have been around for years and sharpen the focus around software developed primarily for internal use. The hosts detailed the importance of understanding these criteria and documenting compliance with these tests for claiming purposes.

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