Read 26 CFR section 1.174-2. “Activities intended to discover information that will eliminate uncertainly concerning the development or improvement of a product.”
Specifically, check out example three in this section. I would be very careful about sweeping all my expenses in this category, but my familiarity with this part of the law is not deep.
I’d love a 174 practitioner to jump in here but that might be asking a lot.
For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
We've heard a mix of advice from various tax professionals on what should be classified as R&D or not. The messaging gets expecially mixed since the R&D tax credit is often handled by a 3rd party that specializes in it. The company specializing in the tax credit may be incentivized to classify as much of your activity as R&D as they can, since they are usually paid a percentage of the total credits they are able to claim for your company.
It certainly complicates running a software company. My cofounder and I need to look at the amortization schedule before making any engineering hire as we basically need to consider their salary nearly 100% R&D. I imagine it's even more complicated for founders with overseas teams.
It would certainly be easier for us to do business if Section 174 was revised :)
singleshot_|1 year ago
Specifically, check out example three in this section. I would be very careful about sweeping all my expenses in this category, but my familiarity with this part of the law is not deep.
I’d love a 174 practitioner to jump in here but that might be asking a lot.
cameroncairns|1 year ago
https://www.law.cornell.edu/uscode/text/26/174
Section 174(c)(3)
``` (3) Software development
For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
```
That being said... it's complicated: https://www.thomsonreuters.com/en-us/posts/tax-and-accountin...
We've heard a mix of advice from various tax professionals on what should be classified as R&D or not. The messaging gets expecially mixed since the R&D tax credit is often handled by a 3rd party that specializes in it. The company specializing in the tax credit may be incentivized to classify as much of your activity as R&D as they can, since they are usually paid a percentage of the total credits they are able to claim for your company.
It certainly complicates running a software company. My cofounder and I need to look at the amortization schedule before making any engineering hire as we basically need to consider their salary nearly 100% R&D. I imagine it's even more complicated for founders with overseas teams.
It would certainly be easier for us to do business if Section 174 was revised :)