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My company develops software. The software is not placed in

Customer Question

My company develops software. The software is not placed in service or sold yet. Are all the labor charges, rental of space, professional fees suppose to be capitalized? If so, once placed in service, is 5 years acceptable to amoritize?
Submitted: 4 years ago.
Category: Tax
Expert:  USTaxAdvising replied 4 years ago.

Is the software you are developing eligible for the Research and Development tax credit? (Below I have extracted a summary of what is "qualifying" for the R&D credit) Let me know if it is eligble and I can further provide you with some answers.


The 1986 Tax Reform Act targeted the definition of qualified research with respect to which the credit is allowed. Initially, the term "qualified research" is defined as research with respect to which expenditures may be treated as expenses under section 174. In addition, section 41(d) sets forth three other requirements, some of which have been subject to extensive controversies between the IRS and taxpayers. Specifically, to constitute qualified research:

  1. The research must be undertaken for the purpose of discovering information that is technological in nature;
  2. Substantially all of the research activities must constitute a process of experimentation; and
  3. The experimentation must relate to a permitted purpose.

This definition is relatively broad and encompasses such activities as:

  • Developing new or improved products, processes or formulas;
  • Developing prototypes or models;
  • Developing or applying for patents;
  • Certification testing;
  • Developing new technology;
  • Environmental testing;
  • Developing or improving software technologies;
  • Building or improving manufacturing facilities; and
  • Streamlining internal processes.