R&D Credits for Software Companies: Scrum Teams, Qualifiers, and Section 174 After OBBBA

This webinar will provide businesses and their tax advisers with a practical discussion of how the R&D tax credit applies to software development activities. Our panel of veteran credit specialists will cover Section 41 criteria for R&D credits, credit requirements for non-internal-use software vs. internal-use software (IUS), and review new Section 174 considerations for software companies in light of the OBBBA (One Big Beautiful Bill Act).

The R&D credit offers valuable benefits to all companies; however, software developers must meet specific requirements to qualify. All software must satisfy a four-part test to be eligible for the R&D credit under IRC Section 41. In addition to the four-part test for software, IUS must also satisfy a three-part high-threshold innovation test under Treasury Regulation Section 1.41-4(c)(6). For IUS, a taxpayer must establish that:

(1) The software is innovative;

(2) The software development involves significant economic risk; and

(3) The software is not commercially available for use by the taxpayer in that the software cannot be purchased, leased, or licensed and used for the intended purpose without modifications… .

Tax practitioners and software companies must also consider the OBBBA revisions to Section 174 expenses. Formerly, TCJA removed the ability to expense R&D costs and required amortization of these expenditures. Most software companies, having historically expensed these costs, were significantly impacted by this legislation. Recently, the OBBBA restored the ability to expense R&D costs. However, transitioning from the old rules to the new requirements can be complicated. Recouping these lost deductions requires deducting prior unamortized costs over 1-2 years, amending tax returns, or expensing these deductions retroactively. Many states have decoupled from OBBBA, adding another layer of complexity to these determinations. Software developers and their tax advisers need to understand the nuances of the R&D credit and Section 174 changes to take advantage of these tax-saving opportunities. 

Listen as our panel of knowledgeable federal tax experts breaks down the requirements for the R&D credit and Section 174 expenses for software developers and their advisers.