R&D Tax Credits

Do software companies qualify for R&D tax credits?

Yes. Software development, including internal-use software improvements. qualifies under the R&D tax credit. Engineering salaries, cloud infrastructure costs during development (AWS, Azure, GCP), and U.S.-based contractor expenses all count as Qualified Research Expenses (QREs). Under the OBBBA, these are now immediately deductible AND credit-eligible.

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Expanded Answer

How do software, SaaS, and AI companies qualify for the R&D tax credit?

Software development is one of the most common qualifying industries for the R&D Tax Credit. Software activities that typically qualify include:

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Building applications with custom functionality or novel architecture.

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Developing internal tools or platforms to solve technical challenges.

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Engineering and testing new software systems or APIs.

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Iterative development cycles aimed at improving performance or functionalityWriting algorithms, data models, or proprietary technical frameworks.

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The key is that the work must involve technical uncertainty, meaning the solution wasn't readily available and required experimentation to achieve.For the IRS four-part test applied to software R&D: https://www.irs.gov/instructions/i6765.

What Qualifies

Activities that commonly qualify

Developing new software features or platform capabilities

Improving performance, scalability, reliability, or security

Building internal tools or technical workflows that required experimentation

Testing different technical approaches to solve engineering challenges

What Does Not Qualify

Work that usually does not qualify

Routine bug fixes with no technical uncertainty

Visual-only updates or minor design changes

Marketing, sales, and customer support work

General maintenance that did not require experimentation

Work already solved through an off-the-shelf implementation

Example Case Study

Example of a software company qualifying for the R&D tax credit

A SaaS company is continuously improving its platform by adding new features, optimizing performance, and scaling its infrastructure to support more users. Its engineering team regularly experiments with different technical approaches to solve challenges.

Because this work involves uncertainty and iterative development, many of these activities may qualify. The company can potentially claim credits on developer wages, contractor costs, and certain development-related expenses.

Quick takeaway

If your team had to work through technical uncertainty, there is a good chance the work deserves a closer look.

Common Industry Examples

SaaS platforms building and improving core features

Companies developing APIs, integrations, or infrastructure

Teams optimizing performance, scalability, or reliability

Businesses creating internal tools or automation systems

AI and data teams developing models and algorithms

Curious if you are missing out on credits?

Start with a quick eligibility check. If it looks promising, we move to a light info request and one technical interview.

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