Last week we took a deeper look at “technical risk,” a component of the second of the three tests that make up the “Higher Threshold of Innovation Test” for internal-use software (IUS). This three-part test is applied when a taxpayer is evaluating whether their software development efforts (for internal-use software) will qualify for federal and state research and development tax credits.
If you would like to review all the blog posts related to Internal Use Software, please begin with the initial blog article by clicking here.
Today we will take a look at the last of the three-part test, Commercial Availability.
Commercial Availability Test
As we have seen in the last few posts, the Higher Threshold of Uncertainty Test is at best incredibly subjective and as a result, has required significant interpretation both by Treasury and the courts.
Practitioners and taxpayers have been thrown to the wolves to interpret the various IRS pronouncements, rulings, temporary regulations, notices and court cases that have landed on both sides of the fence. On top of all the viewpoints (including that of Congress) are “experts” that have testified based on their industry experience, technical expertise and interpretation.
As a side note, in reviewing the various landmark court cases, I found it interesting that experts in the area of software development were giving their industry-based interpretation of a legal definition provided by Congress. Congress provided a definition that, in theory, would give their perception of what should be allowed for a taxpayer to receive benefit of their software development efforts. Expert testimony by industry professionals provides a definition based upon their experience; does that sound like they are singing from the same hymn book to you?
I applaud the courts for recognizing the difference and discounting the testimony provided during the court proceedings.
Third Test Dependent upon the First Two Tests
At least this final test is relatively easy to understand when compared to the first two tests in the Higher Threshold of Innovation Test. Simply, the taxpayer must show that the software it developed was unavailable commercially without making changes, or modifications that would have qualified under the first two tests (namely, the Innovativeness Test and the Significant Economic Risk Test). Commercially available is defined as software that was available to be purchased, leased, or licensed by the taxpayer when they undertook the project.
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on R&D tax credits and other US tax incentives.