On Jan. 16, 2015, the IRS released proposed regulations under section 41 of the Internal Revenue Code (IRC) related to software development that revise the scope of the exclusion for internal use software (IUS), define IUS, and clarify what is not IUS.
Section 41 of the IRC provides a general exclusion of IUS from the R&D credit. However, under prior regulations, IUS was not specifically defined; rather, software was deemed to be IUS if it was not developed to be commercially sold, leased, licensed, or otherwise marketed to third parties.
The proposed regulations provide the following important modifications related to IUS:
The new proposed regulations related to software development pave the way for more companies to take advantage of the R&D credit. The regulations are proposed to apply to tax years ending on or after the date of publication as the final regulations. However, the IRS will not challenge return positions consistent with the proposed regulations for tax years ending on or after Jan. 19, 2015.
If your company is incurring costs to develop software platforms, programs, systems, or applications, it’s important to consider potential R&D credit opportunities, especially in light of the new proposed regulations.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
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