Brady Bryan, CEO
Annually, we have the pleasure to speak to dozens (if not hundreds) of CFO’s and CEO’s of software companies. Many are purely in the software development space, while others are performing software development in furtherance of another core business like financial services. Most are surprised to know that both federal and state research and development (“R&D”) tax credits may apply to their company. In fact, the Internal Revenue Service (“IRS”) states that “software design is inherently iterative,” and thus may qualify for the R&D tax credit. So, where does your company stand?
The R&D Tax Credit was designed as a “Brain-Magnet” of sorts to encourage a certain kind of company spend. Traditionally thought of as only applying to inventions and patentable ideas, it is much more expansive and can apply to companies that are developing new and improved products and processes, as well. The IRS audit guidelines provides examples of “low risk” software R&D, which “rarely fails” to be considered R&D:
- First releases of new software products
- System software development
- Development of specialized technologies like artificial intelligence
- Software developed as part of hardware
However, there are other examples the IRS provides of what can constitute R&D, including functional enhancements to existing software. However, projects need to be reviewed on a case-by-case basis by qualified consultants.
Companies performing R&D on behalf of others must also meet an additional test to ensure their work is not “funded.” “Funded research” is technically defined and typically does not mean commonly held definitions. For example, receiving payment for a good or service does not necessarily mean it is funded. BRAYNiacs hale from legal, accounting, and engineering backgrounds and painstakingly review expenses and agreements for these very purposes.
Contact us to receive a complementary Phase I look at your R&D tax credit situation. We don’t replace your CPA – we collaborate with them to maximize the tax credits an incentives allowed under the law. Please feel free to reach out (888) 773-8356 or email@example.com.