Generate cash from your past and future investments to develop or improve software.
If your organization has paid for software to be developed or improved in the U.S., you may be eligible for federal and state R&D tax credits equaling up to 25% of qualified spending. If your organization is financing such activities outside of the U.S., the incentives may be even greater.
The dollar–for–dollar offsets provided by R&D tax credits against regular income tax liability have enabled many startup and mature businesses in the technology industry to hire additional employees, invest in new technologies, and finance other business objectives.
Your organization can benefit from R&D tax credits even if it’s not paying income taxes currently, because many states offer refundable R&D credits. Moreover, state and federal credits may be carried back to the prior tax year and carried forward to later tax years.
Is Your Technology Organization Eligible?
Your Organization may qualify for R&D credits if it pays the following types of employees or contractors to develop or improve software:
- Software engineers
- Software developers
- Software programmers
- Software architects
- Applications engineers
- Hardware engineers
- Control systems engineers
- Applications engineers
- Systems analysts
- Network engineers
- Database architects
- Analytics engineers
- Product engineers
- Product managers
- QA engineers
Which Activities Qualify for the R&D Tax Credit?
Examples of qualifying activities include:
- Designing and developing new software architectures to improve scalability, security, or performance
- Creating prototypes or beta versions of applications to test functionality and user experience
- Developing algorithms or data processing techniques for machine learning, AI, or advanced analytics
- Redesigning legacy systems into modern platforms using new frameworks or cloud technologies
- Building and testing new modules or features to meet specific customer requirements
- Developing new or improved processes for software deployment (e.g., CI/CD pipelines, automated testing frameworks)
- Improving application performance or reliability through optimization of code, database queries, or system architecture
- Developing new or improved cybersecurity measures to comply with federal or state regulatory requirements
- Creating innovative integration techniques for interoperability between disparate systems or APIs
- Experimenting with emerging technologies (e.g., blockchain, edge computing) to enhance product capabilities
These projects do not have to succeed to qualify for the R&D tax credit, and they don’t have to revolutionize the industry to qualify. Attempts to develop incremental, evolutionary product and process improvements are eligible as well.
For more information on calculating and claiming the R&D tax credit, read our R&D tax credit FAQs.