1/16/2015
New Rules Provide Essential Clarity to Businesses on Credit Eligibility
WASHINGTON - The U.S. Department of the Treasury and Internal Revenue Service (IRS) today released proposed regulations that provide guidance on credit eligibility for research and experimentation (R&E) on computer software that is developed by the taxpayer primarily for its own internal use (internal use software). The tax code generally excludes computer software research from the definition of qualified research if the computer software is developed by, or for the benefit of, the taxpayer primarily for internal use. However, neither the code nor prior administrative guidance specifically defined software that is developed "primarily for internal use." Today's proposed regulations define internal use software and provide rules for exceptions to the general rule that would exclude certain software development from credit eligibility. The proposed regulations also provide examples that illustrate the application of R&E credit rules to software development activities.
"Through these proposed regulations, we are providing taxpayers with the clarity that they need to invest in software innovation," said Assistant Secretary for Tax Policy Mark J. Mazur. "Computer software plays a vital role in 21st century business activities, and today's tax guidance will help encourage U.S. firms to make these important investments."
The proposed regulations published today define internal use software as software that is developed for use in general and administrative functions (limited to financial management functions, human resource management functions, and support services functions) that facilitate or support the conduct of the taxpayer's trade or business. These proposed regulations provide that software is not developed primarily for internal use if it is developed to be commercially sold, leased, licensed, or otherwise marketed to third parties, or if it is developed to enable a taxpayer to interact with third partiesor to allow third parties to initiate functions or review data on the taxpayer's system. The proposed regulations allow a taxpayer to satisfy a high threshold of innovation test to allow otherwise excluded internal use software development to be considered qualified research.
Taxpayers may rely on the proposed regulations pending finalization.
For proposed regulations published on the Federal Register, click here.
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