Beyond Coding: Six Software Development Activities Qualifying for R&D Tax Credits

For CFOs and finance leaders in the software development industry, maximizing financial opportunities while maintaining innovation is critical. One often overlooked benefit is the Research & Development (R&D) Tax Credit, a lucrative incentive to reward companies investing in technological advancements. Many software development activities qualify for these credits, potentially saving your organization hundreds of thousands—even millions—of dollars in tax liability.

Understanding which activities qualify for R&D tax credits is key to leveraging them. Here are six common software development activities that meet the IRS’s definition of qualified research.

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1. Developing New or Improved Software Solutions

Creating new software solutions or enhancing existing ones through improved functionality, performance, scalability, or security can qualify for R&D tax credits. Whether you’re developing an innovative software product, refining an internal platform, or optimizing cloud-based applications, these activities often meet the IRS’s four-part test for qualified research:

• Permitted Purpose – The software must be intended to develop or improve functionality, performance, reliability, or quality.

• Technological in Nature – Development must be based on computer science or engineering principles.

• Elimination of Uncertainty – The project must involve uncertainty regarding capability, methodology, or design.

• Process of Experimentation – A systematic approach, including prototyping, modeling, or testing, must be used.

Want to learn more about the four-part test? Click here!

2. Enhancing Software Architecture and Infrastructure

Improving a software system’s infrastructure to enhance performance, security, or scalability often involves complex problem-solving and qualifies for R&D tax credits. Activities may include:

• Transitioning from monolithic to microservices architecture
• Developing API integrations or improving interoperability

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3. Developing Proprietary Algorithms or Artificial Intelligence (AI) Models

Many software companies invest in machine learning, artificial intelligence, and proprietary algorithms to drive automation and analytics. These projects qualify because they require substantial research, testing, and iteration. Qualifying activities include:

• Training and refining AI/ML models for predictive analytics
• Developing complex algorithms for data processing, security, or automation
• Experimenting with neural networks, natural language processing, or image recognition

4. Improving Software Performance and Cybersecurity Measures

With cybersecurity threats evolving, companies must continuously enhance their security protocols, encryption methods, and software reliability. These efforts can qualify as R&D activities, particularly if they involve:

• Developing authentication and access control improvements
• Reducing software latency and optimizing performance
• Conducting penetration testing and vulnerability assessments as part of development

Do you have more questions about the R&D Tax Credit? Read frequently asked questions here! 

5. Developing New User Interfaces (UI) and User Experiences (UX)

User experience (UX) and user interface (UI) improvements involve research, iteration, and technological advancements. Many companies engage in:

• A/B testing different UI elements for improved engagement
• Developing new front-end frameworks or interactive elements
• Implementing accessibility features and responsive design for better usability
• Enhancing real-time responsiveness and performance on web and mobile platforms

6. Integrating Emerging Technologies into Software Solutions

Many companies are incorporating cutting-edge technologies to enhance software functionality, which often qualifies for R&D tax credits. These activities include:

• Implementing blockchain for security and transparency
• Developing software that supports Internet of Things (IoT) connectivity

Wondering if you might qualify for the R&D Tax Credit? Take our Free Assessment! 

How to Maximize Your R&D Tax Credit Claim

To maximize your R&D tax credit benefits, your company should:

• Document everything – Maintain thorough records of development activities, including project notes, prototypes, testing logs, and payroll records.
• Track time effectively – Assign time spent by developers, engineers, and QA testers to qualifying projects.
• Leverage tax experts – Work with experienced R&D tax credit specialists who understand software development and IRS compliance requirements.

Wondering if your documentation is sufficient to withstand an audit? Click here to see! 

Take Action: Don’t Leave Money on the Table

If your company is engaged in software development, there’s a high chance you qualify for R&D tax credits. These incentives provide substantial tax savings, allowing you to reinvest in innovation and growth.

Acena Consulting specializes in identifying and maximizing R&D tax credit opportunities for software development companies. Contact us today for a free consultation to explore how much your company can save.

📩 Get in touch today to see if your software development activities qualify for R&D tax credits.

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Edited by Rae Fox-Smoltz, BSBA, BSENRE, Project Manager at Acena Consulting. Photo courtesy of Mikemacmarketing on Flickr.