R&D Tax Credit for Software Companies

Software development is one of the most common sources of qualifying R&D activities — and one of the most underutilized. If your team writes code to solve technical problems, you may be generating qualified research expenses every sprint.

What qualifies

Software development activities qualify for the R&D credit when they meet the four-part test. In practice, this means your team must be:

• Developing or improving a software product, feature, or system
• Facing technological uncertainty about the design, method, or capability
• Evaluating alternatives through a process of experimentation (testing, prototyping, iterating)
• Relying on computer science or engineering principles

Common qualifying activities

New product development

• Architecting systems where scalability, reliability, or performance requirements create design uncertainty
• Building data pipelines where throughput, latency, or data integrity outcomes are not predetermined
• Developing machine learning models where accuracy or performance is uncertain
• Creating APIs or integration layers where compatibility challenges require iterative solutions

Feature development

• Implementing features that require solving new algorithmic problems
• Building real-time collaboration features where concurrency and conflict resolution are uncertain
• Developing search, recommendation, or ranking systems where the approach is not established
• Building security or authentication systems to meet novel requirements

Infrastructure and DevOps

• Designing deployment architectures for reliability and scale where trade-offs must be evaluated experimentally
• Developing automated testing frameworks to handle complex integration scenarios
• Building monitoring or observability systems that require solving data aggregation challenges
• Optimizing database queries or storage systems where performance outcomes are uncertain

Internal tools

• Developing proprietary workflow tools where the design requires solving technical problems
• Building automated data processing systems where accuracy and edge-case handling are uncertain
• Creating admin or operations platforms with novel technical requirements

Note: internal-use software faces additional qualification requirements under IRC Section 41(d)(4)(E). See Common Disqualifiers for details.

What does not qualify

• Routine bug fixes where the solution is known
• Configuration or customization using established techniques
• Cosmetic UI changes with no technical uncertainty
• Porting existing functionality to a new platform without facing new technical challenges
• Data entry, content creation, or manual testing

Qualifying expenses for software companies

Most QREs for software companies come from employee wages:

• Developer and engineer salaries (proportional to time spent on qualifying work)
• Technical lead and architect time spent directly on R&D
• QA engineer time spent developing test methodologies (not routine testing)
• DevOps engineer time spent on qualifying infrastructure work

Contract development may also qualify at a reduced rate if the contractor performs qualifying work on your behalf and you retain the IP.

Related pages

• What Qualifies — the four-part test in detail
• Qualified Research Expenses — what expenses count
• Documentation Requirements — what records to keep
• Estimate your credit — free calculator