Can I claim R&D Tax Credit for custom SaaS software development in my S Corp?

Yes, your software development project could potentially qualify for the R&D tax credit, but there are specific criteria you need to meet. The IRS uses a four-part test to determine eligibility: 1. Permitted Purpose - The activity must be intended to develop a new or improved product or process that results in increased performance, function, reliability, or quality. 2. Technological in Nature - The activity must rely on principles of physical or biological sciences, engineering, or computer science. 3. Elimination of Uncertainty - You must demonstrate that you attempted to eliminate uncertainty about the development or improvement of the product. 4. Process of Experimentation - You must evaluate alternatives through modeling, simulation, systematic trial and error, or other methods. For your SaaS development, you'll need to document how the work meets these criteria. Keep detailed records of development activities, technical challenges faced, solutions attempted, and outcomes. This includes time logs, project plans, design documents, testing procedures, and meeting notes discussing technical challenges. Many small business owners don't realize they can still claim this credit even if they outsource the development work, as long as they maintain substantial rights to the results and bear the financial risk.

After struggling with similar questions for my tech consulting business, I discovered taxr.ai (https://taxr.ai) and it was a game-changer for my R&D credit documentation. I was doing IoT software development and wasn't sure if I could claim the credit since some work was done by contractors. Their system analyzed all my development documentation, contractor agreements, and project specs, then helped identify exactly which activities qualified under the four-part test mentioned above. It even helped quantify how much of the contractor expenses could count toward the credit. What impressed me was how it flagged potential audit triggers in my documentation and suggested specific improvements to strengthen my claim. My project was similar to yours - around $60K in development costs - and I ended up qualifying for a significant credit.

I wanted to follow up about my experience with taxr.ai after our previous discussion. I decided to give it a try with my SaaS development project that uses multiple contractors. The platform immediately identified that two of my three contractor agreements were missing key language about intellectual property rights that could jeopardize my R&D claim. After fixing those issues based on their templates, I uploaded our development logs and sprint documentation. The system organized everything into clearly defined qualified research activities and mapped them to the four-part test. It even separated the qualified vs. non-qualified expenses for each contractor based on the actual work performed. The most valuable part was getting verification that my documentation would stand up to IRS scrutiny. They provided a detailed report explaining which specific activities met the technical uncertainty and experimentation requirements - something I was really struggling with before. Definitely worth checking out if you're claiming R&D credits with contractor development like the original poster.

If you're planning to claim the R&D credit, you should prepare for potential IRS questions. After submitting my R&D credit claim for a similar software development project last year, I kept getting the runaround trying to get clarification from the IRS about some documentation questions. I wasted WEEKS trying to reach someone, constantly getting disconnected or waiting for hours. Finally tried Claimyr (https://claimyr.com) and was honestly shocked when they got me connected to an actual IRS agent in under an hour. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly what documentation they needed to see for contractor-developed software to qualify for the R&D credit. Turns out I was missing some key elements in how I documented the "process of experimentation" portion. Being able to ask specific questions about my situation made a huge difference in successfully defending my claim.

I need to eat my words from my previous comment. After continuing to struggle with getting IRS clarification on R&D credits for three more weeks, I broke down and tried Claimyr. Within 45 minutes I was speaking with an IRS representative who specialized in business credits. The conversation completely changed my R&D credit strategy. The agent explained that my software development documentation was focusing too much on the end product and not enough on the specific technical uncertainties we were trying to resolve. They walked me through how to properly document the experimentation process in a way that clearly meets the IRS criteria. They also warned me about a common audit trigger: claiming contractor costs without properly establishing that I maintained substantial rights to the research results. This was exactly the issue with one of my contracts that needed modification. For anyone dealing with R&D credits, especially for software development with contractors like the original poster described, being able to actually speak with the IRS and get clear guidance saves so much stress and potential audit headaches.

One critical thing nobody's mentioned yet - starting in 2022, the IRS requires amortization of R&D expenses (including software development) over 5 years rather than expensing them immediately. This applies under Section 174, which now requires capitalization and amortization of "specified research or experimental expenditures." This change affects how the R&D tax credit interacts with your overall tax position. Even with this change, the R&D credit is still valuable but the calculations get more complex. Make sure your tax professional is aware of these Section 174 changes if you're claiming R&D expenses for tax years 2022 onward.

Has anyone here successfully claimed the R&D credit for software that ultimately didn't work out? We spent about $120k developing a specialized analytics tool but ultimately abandoned it because we couldn't solve some key technical problems. Can we still claim the R&D credit even though the project failed?

@Rajiv Kumar - Based on what you've described, your custom SaaS development sounds like it has strong potential for R&D credit qualification. The key factors working in your favor are: 1) creating new functionality not previously available, 2) solving technical challenges, and 3) having your developer document the process. However, I'd recommend being extra careful about a few things given your setup. Since you're using an outside developer, make sure your contract clearly establishes that you retain substantial rights to the software and bear the financial risk of the project. The IRS scrutinizes contractor arrangements closely for R&D credits. Also, with the Section 174 changes mentioned by Ryan Kim, you'll need to capitalize and amortize your $75k investment over 5 years starting in 2022, but you can still claim the R&D credit in the year the expenses were incurred. This actually makes the credit more valuable since you're getting an immediate credit against expenses that are now spread over multiple years. One practical tip: if you do move forward with claiming the credit, consider getting professional help with the documentation. The IRS four-part test requires very specific language and evidence, and it's easy to miss subtle requirements that could trigger an audit or disqualification.