Software companies are probably the fastest growing market for the R&D tax credit. From companies that develop and market software to companies that build internal use software to make their businesses more efficient, take advantage of the R&D tax credit. Software development companies tend to generate significant tax credits from just a few software developers given that much of their activity is labor based and qualified for the R&D credit. Contract software developers based in the United States may also qualify for the R&D tax credit. There are often qualified costs associated with renting or leasing computers commonly referred to as cloud computing. In addition, startup software companies (less than $5 million in revenue) may use the credit against payroll tax even if they are not yet profitable. This additional benefit provides an important source of cash flow during the startup company’s first few years in business.
Qualified Research Activities for Software Development Companies
- Design and development of new software components
- Design and development of new or improved software applications
- Internal Use Software development
- Virtual reality or game development
- Developing data mining techniques including big data analysis and processing
- Development of firmware
- Development of POS systems
- Integrating hardware and software components
- Development of document management systems
- Development of education-based software
- Design and development of CRMs
- Design and development of compliance systems
- Healthcare system and application development
- Development of financial and accounting software
- Developing simulators
- Development of data center tools
- Development of monitoring systems
- Development and integration of databases
- Designing and experimenting with computer hardware
- Reducing system latency
- Developing messaging technologies
- Network development and optimization
- Building QA or testing environments
- Integrating disparate or legacy systems with new software
R&D Tax Credit Case Study: Software Development
This company develops specialized digital signage solutions requiring significant software development.
R&D Tax Credit Qualification for Software Development
This company continuously looks to integrate options that will offer scalable and flexible solutions. Research started with a collaborative conceptualization process, which included a high-level feasibility analysis related to functionality, performance, quality and reliability. Developers followed standardized, but situationally adaptive and precise coding guidelines, to generate code. Solutions evolved through a collaborative, cross-functional effort where developers were assigned a task, or user story, to complete in a single development cycle. The development cycle, or sprint, was an iterative time box in which a user story was accomplished in a span of a few weeks. During this time, the developer designed, coded, tested, and fully refined or optimized the user story. Depending on the complexity of the effort, the team met daily or weekly to track the progress of each task and discuss the technical issues and design challenges.
A simulation environment was also created to be an advanced computing platform with the capability of creating production-like environments for alpha testing. This allowed the company to evaluate the soundness of the software along with any problems that the development team did not foresee during development. Once it passed simulation testing it moved to limited testing in the field or beta testing. Early software iterations typically would not function or perform as designed so the development team analyzed the test results to determine where the code needed to be optimized, refined, or completely redesigned. As the software failed, the testing process repeated from the beginning and the software cycled through revisions before it was deemed ready for deployment.
Analysis took place throughout the development life cycle. Each iteration involved the entire team and included full software development cycles (planning, designs, requirement analysis, coding, and testing). Because the applications were unpredictable, these incremental cadences allowed a demonstration of the functionality. The requirements of a user story map to real-world scenarios, framed the acceptance criteria of the project. The goal was to try out different conditions so programmers could write unit tests, one-by-one, to obtain insight at each stage so that the company can review the code base in small modular units. Static code analysis tools were often used while the stories are sized and prioritized so that weaknesses, security vulnerabilities, or potential concurrency issues could be identified. This methodology fosters a no-time-delay strategy between coding and testing so that results can be optimized, refined, or completely redesigned quickly.
Once all iterations of the systematic testing process were completed, the product was released.
The Results Speak for Themselves
This software developer with annual sales of $2.7 million realized a combined federal and state tax credit of over $101,000.