How to leverage the R&D tax credit for your software company

In the digital age, software companies serve as the architects of innovation. Behind this innovation – from the development of seamless interfaces to new and exciting application advancements – there are research and development (R&D) efforts that can be leveraged to save money and move the business forward. Through the R&D tax credit, these activities can help software companies re-invest in themselves and improve their bottom line.

Rewarding software companies for innovation

Originally introduced in 1981, its primary objective was to incentivize businesses to invest in innovation, thereby fueling technological advancement and enhancing the nation’s competitiveness on the global stage. Originally geared towards conventional industries, the tax credit now also applies to the ever-changing field of software development.

Essentially, the R&D tax credit is designed to reward activities that result in the creation or improvement of products, processes, software, techniques, formulas, or inventions. For software companies, this covers a variety of eligible activities throughout the entire software development lifecycle. From conceptualization and design to implementation, testing, and deployment, each stage represents new insights for innovation, where qualifying activities can be found.

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Qualifying for the R&D tax credit

A key requirement for qualifying for the R&D tax credit is the existence of uncertainty. In software development, uncertainty is a common theme throughout the creative process. Whether it’s developing new algorithms, resolving compatibility issues, or predicting user behavior, software engineers are regularly exploring unknown territories. This inherent uncertainty is what prompts innovation and encourages software companies to find unique solutions to complex problems.

The R&D tax credit also rewards technical challenges that involve the use of engineering or computer science principles. In terms of software development, this includes a wide range of activities, such as optimizing code efficiency, developing novel data structures, and integrating advanced technologies like artificial intelligence, machine learning, and blockchain. By incentivizing investments in technical expertise, the R&D credit helps foster innovation.

Despite the opportunities available for software companies in the R&D tax credit space, qualifying for the credit can be a complex process. Because software innovation is intangible, documenting eligible activities and expenditures requires careful attention to detail. Software companies must maintain detailed records of development activities and clearly show the connection between R&D efforts and technological advancement. Therefore, it’s important for software companies to be proactive when it comes to R&D tax credit compliance, utilizing internal controls and processes to systematically track eligible activities and expenditures.

Leveraging the R&D tax credit for your software company

If you’re unsure about how to qualify for the R&D tax credit, our advisors at Abdo can offer guidance and support through the entire process. Our R&D team conducts a study of your activities to determine your eligibility, advises you on documentation, integrates the credit into your tax return, and then helps you continually leverage the credit on the road ahead. Learn more about our R&D tax credit services and then reach out for a feasibility analysis to determine if you would qualify.