IRS releases final research credit regulations on internal-use software

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October 2016


The final research credit regulations issued today:

  • Provide a definition of software developed primarily for internal use and describe software not developed primarily for internal use;
  • Provide that certain IUS is eligible for the research credit if the software satisfies the ‘high threshold of innovation’ test, and also that certain third-party-facing software is not subject to the definition of IUS and therefore must meet only the general four-part test to be eligible for the research credit;
  • Provide rules for computer software that is developed for both internal use and non-internal use (dual-function computer software), including a safe harbor for determining if any of the expenditures with respect to dual-function computer software are qualified research expenditures;
  • Include examples to illustrate application of the regulations for IUS;
  • Include examples at Reg. sec. 1.41-4 to illustrate the application of the ‘process of experimentation’ requirement to computer software under Section 41(d)(1)(C);
  • Incorporate Treasury’s belief as to where within the software development lifecycle the intent for development should be defined;
  • Provide additional clarification on what Treasury defines as ‘general and administrative functions,’ an item on which taxpayers and practitioners extensively commented; and     
  • Incorporate how ‘hosting’ will be treated with respect to IUS and non-IUS development.

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Brett Ritter

Brett Ritter

Partner, National R&D Tax Services Leader, PwC US

Randel Friedman

Randel Friedman

Partner, PwC US

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