Posted by Jeffrey Feingold on 03.06.25

Software development is often overlooked when it comes to research and development (R&D) tax credits, which is rather ironic when you think about the innovation, creativity and invention that is such an intrinsic part of this industry. Any time your software company makes improvements to products or processes, there is a good chance that your activities may qualify for valuable R&D tax credits that can greatly reduce your tax burden.

In fact, federal R&D tax credits are meant to reward companies for a variety of improvements and advancements. These activities must meet the IRS four-part test, which includes:

• Elimination of Uncertainty
• Process of Experimentation
• Technological in Nature
• Business Component (Qualified Purpose)

While the test may seem complex and cause some software developers to hesitate, a reputable R&D tax credit expert can help determine which of your activities may qualify.

Case Study

For example, Tax Point Advisors helped a software company claim over $500,000 in federal and state R&D tax credits. This particular company focuses its product development on the introduction of new and innovative electronic pricing tools. In this case, its qualifying activities included: coding and application development; usability testing; database design; and the evaluation of multiple concepts and solutions. Read the full case study.

Given the volume of R&D integral to software design and development, companies involved in these activities are ideal candidates for claiming the tax credit. Most states also offer state R&D tax credits that can significantly reduce a software developer's state income tax burden.

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

The U.S. Treasury Department in 2015 released new regulations regarding internal use software (IUS) and its eligibility for the R&D tax credit. Read related blog: Final IRS Regulations Allow R&D Tax Credits for Certain Internal Use Software

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for software businesses. And given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving federal and state tax credit opportunities.

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

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, read our e-book: The Business Owner's Guide to R&D Tax Credits.