Posted by Jeffrey Feingold on 03.12.25

Artificial intelligence (AI) is transforming the way businesses operate. The influence of AI extends beyond the technology sector; companies across various industries are adopting AI software tools and developing their own proprietary technologies to boost efficiency, foster innovation, and maintain a competitive advantage.

In addition to the operational improvements that AI software development can bring, your company may also be eligible for financial benefits. If you are involved in the development or research of AI software development to enhance processes and procedures, you might qualify for the research and development (R&D) tax credit.

What Kinds of AI Software Development Activities Could Qualify for the R&D Tax Credit?

Research and Development is a core component of software development. Software is designed to address specific business challenges, such as effectively managing data to speed up decision-making and minimize human error. To be considered a qualified research activity under the R&D tax credit, an activity must meet the following criteria, often referred to as the “four-part test”:

1. Innovation and Advancement - Software development typically involves creating new or improved products, services, or processes, which aligns with the aims of R&D incentives.
2. Technical Uncertainty - To qualify for R&D tax credits, a project must address technical uncertainties. Software development projects often face challenges and uncertainties related to complex algorithms, coding, system architecture, and more.
3. Experimentation - Developing software commonly includes trial-and-error processes, where various approaches are tested to find optimal solutions to complex problems. This might involve experimenting with different algorithms to determine which one enhances performance most effectively.
4. Customization - Eligible R&D activities do not solely encompass the creation of brand-new software. If you customize existing software to cater to a different sector or improve its functionality by adding integrations, this can also qualify for R&D credits.

Typical Qualifying R&D Credit Activities for Software Developers

• Programming software source code
• Designing and developing the structural software architecture
• Establishing electronic interfaces and functional relationships between various software modules
• Conducting requirements, domain, software elements, or scope analysis for a new functional software enhancement
• Evaluating and establishing functional specifications
• Conducting unit, integration, functional, performance and regression testing
• Compiling and testing source code
• Developing new or improved technologies

If your R&D activities qualify for the tax credit, it can help offset your qualified research expenses (QREs), which include:

• Wages paid to employees conducting, directly supervising, or supporting R&D activities
• Supplies used in the R&D process
• Expenses incurred for certain third-party contractors who perform qualifying R&D activities
• Cloud computing costs

How Can Companies Investing in AI Software Development Benefit from the R&D Tax Credit?

The R&D tax credit can significantly reduce a company’s tax liability, positively impacting its bottom line. This financial relief is particularly valuable for businesses that invest heavily in software for artificial intelligence (AI). By alleviating the financial burden of innovation, companies can use the savings to reinvest in further research and development, hire more talent, or expand their
operations. In addition to the immediate financial advantages, utilizing the R&D tax credits can make a company more appealing to investors and stakeholders. In today's market, there is increasing appreciation for businesses committed to innovation and technological advancement. Investors tend to favor companies actively engaging in research and development, viewing these efforts as a sign of long-term growth potential and competitive strength. Developing and implementing AI tools often requires significant financial investment. The R&D tax credit can help offset the considerable costs associated with pursuing technological advancements in AI by:

• Providing a direct financial incentive that reduces the cost of innovation
• Increasing a company’s appeal to investors and stakeholders by highlighting its commitment to technological progress

Request a free assessment to determine qualifying R&D tax credit eligibility

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.