IRS Declines To Broaden R&D Rules On Internal Use Software

The IRS released final R&D tax credit regulations on Oct. 3 (T.D. 9786) that reject many of the suggestions for easing restrictions on internal use software, but still provide significant opportunities.

The final rules come nearly two years after the highly anticipated proposed regulations (REG-153656-03) were issued in January 2015. They should finally settle much of the uncertainty for determining when software is developed for internal use and therefore subject to the high-threshold of innovation test for eligibility for the R&D credit. Although the final regulations did not incorporate many taxpayer suggestions, they do retain the bulk of the taxpayer-favorable rules in the proposed regulations. Taxpayers will still benefit from a narrower definition of internal use software, and a safe harbor for carving out eligible portions of dual use software.