Software
development is a strong candidate for federal R&D tax
credits. Many aspects of software development
are tax credit eligible; these include preliminary scoping,
prototyping, core build, testing, evolution, as well as
integration with various platforms and operating systems.
In addition, many companies are adding software-based components
to their traditional product offerings. As more companies
develop such features, more companies achieve R&D tax credit
eligibility.
Every Company is a Software
Company
Companies outside
the traditional high-tech industry are becoming involved in
software development. The November 2011 Forbes article, "Now
Every Company is a Software Company" shows how some of America's
most venerable companies are turning to software to enhance
their product lines and find new growth.
Ford Motor Company has
equipped vehicles with WiFi receivers and other technological
features guided by software -- changing an automobile from a
mere Point A to Point B transportation asset to an entertainment
source. Similarly, Honeywell's Smart Thermostat is
operated by highly modernized software that is one of many
technologies changing the way people can control home
systems. Google's acquisition of Nest, a home monitoring
device company, is also indicative of the desire to optimize
data in the home environment, including voice command software.
Booz & Company
In 2013, the Booz
& Company annual study of R&D rated software and
internet sector R&D as the fastest growing R&D category
at 22.1% of all R&D. This growth is indicative of a
major shift towards data driven solutions within global
industry. If this shift continues as projected, the
potential for R&D tax credits within the software industry
will increase greatly.
Mobile Applications
The dominant
presence of smartphones greatly expands the scope of mobile
phone software development. Mobile application development
has emerged as a leading category in the software industry, with
enterprise applications earning more for developers than
consumer applications. Developing this unique
software for both iOS and Android platforms often requires
extensive R&D efforts, making app developers prime
candidates for an R&D tax credit.
Start-Ups
Early stage
start-ups are often highly R&D-intensive. Because the
credit awards increased research activities; the increase in
R&D expenses in start-ups can correlate to large tax
credits.
Because credits can be
carried forward 20 years, establishing R&D tax accounting
practices early often pays large dividends down the road.
This is especially true for start-ups who see acquisition as
their eventual end-game.
Conclusion
More companies
are following the IBM model of using data to provide solutions
to a wide array of problems. Even IBM has indicated their goal
is to develop more software related to social media, cloud
computing and mobile phones. Both software companies and
companies delving into software-based features and solutions
should examine their R&D tax credit eligibility.
