Software ATG – Introduction
This document provides guidelines for examining the I.R.C. § 41 credit for increasing research activities (“research credit”) claimed relative to software development. Specifically, this document provides guidelines on applying the process of experimentation test of I.R.C. § 41(d)(1)(C) and selected exclusions from qualified research of I.R.C. § 41(d)(4) to software development activities, whether for internal-use or for commercial sale, lease or license.[i] These guidelines are not an official pronouncement of the law and cannot be used, cited, or relied upon as such.
If a decision is made to examine a taxpayer’s software development activities for purposes of the research credit, these guidelines will aid in risk analysis and will help focus limited audit resources by ranking software development activities at lowest to highest risk of not constituting qualified research under I.R.C. § 41(d). These guidelines, however, do not address all potential research credit issues, some of which may be more material and less burdensome to examine than an I.R.C. § 41(d) activity evaluation. Accordingly, examiners should also refer to the Research Credit Audit Techniques Guide.
Nothing in these guidelines precludes an examiner from proposing any proper adjustment, even if the adjustment arises from an activity that may not be identified in these guidelines as being at greatest risk of not constituting qualified research under I.R.C. § 41(d) .
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[i] These guidelines do not, however, address the I.R.C. § 41(d)(4)(E) internal-use software exclusion and the applicable exceptions. For guidance on this exclusion, see Advance Notice of Proposed Rulemaking, Credit for Increasing Research Activities (REG-153656-03), 69 F.R. 43 (January 2, 2004) . Furthermore, these guidelines do not address several other exclusions that might apply to the taxpayer’s activities. For further guidance, refer to the Research Credit Audit Techniques Guide.
