R&D Credit for Internal Use Software
In an R&D tax credit analysis, the IRS makes a distinction between software that is to be sold for commercial production or intended for use by 3rd parties (such as the examples mentioned above) versus internal use software that is developed by the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business.
Companies in certain sectors such as banks, retailers, brokers, insurance companies, hedge funds and financial service companies often have large IT departments that develop software for their own operations. This potentially makes them eligible for the R&D credit as well.
Internal use software must pass the High Threshold of Innovation test. Examples include:
- Warehouse Management System