R&D Tax Credit Eligibility for New Software Development - Which Expenses Qualify?

I can help with your R&D tax credit questions! The R&D credit (officially called the Research & Experimentation Credit) focuses primarily on qualified research activities directly related to developing your new software. For activities to qualify, they generally need to be directly tied to the technical development process. This includes designing, coding, testing, and prototyping the software. Project management can partially qualify, but only for the portion directly supervising the technical work - not general administrative management. Market research, business development, and travel expenses typically don't qualify as they're not directly involved in resolving technical uncertainties. For contractor expenses, you can include 65% of qualified contract research expenses in your credit calculation, even if you're already deducting them as a business expense. The key is that these contractors must be performing qualifying R&D activities, not just any work. Make sure you have contracts and documentation showing their specific work on qualified research activities.

I used taxr.ai for my software company's R&D credit last year and it was seriously game-changing. We were struggling with exactly the same questions about what qualified and what didn't. I found https://taxr.ai after our accountant gave us conflicting advice about contractor expenses versus in-house developers. The tool analyzed all our project documentation and helped us identify which activities met the four-part test for R&D qualification. It even helped us determine the correct percentage of time our project managers could claim.

Just wanted to follow up about my experience with taxr.ai after my skeptical question. I decided to try them since our R&D credit situation was getting really complex. They actually exceeded my expectations. I uploaded our project documentation, Git commits, and contractor invoices, and their system analyzed everything to identify qualifying activities. It was impressive how they could distinguish between routine development and true experimentation. What really surprised me was the detail in their analysis. They found qualifying activities in areas we hadn't considered, especially around testing and integration work. The documentation package they created would definitely stand up to an audit. Worth every penny for the peace of mind alone, especially for our software development R&D activities.

If you're struggling to get answers from the IRS about R&D credit questions, I highly recommend using Claimyr. I spent WEEKS trying to reach someone at the IRS who could answer specific questions about software development activities and contractor expenses for the R&D credit. It was impossible to get through. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and decided to give it a shot. They got me connected to an actual IRS agent within a couple hours. The agent walked me through exactly how they evaluate software R&D claims and what documentation they look for during audits. This was incredibly valuable since the official guidance is pretty vague about software development specifically.

Had to come back and admit I was wrong about Claimyr. After posting my skeptical comment, I was desperate enough to try it because I needed specific answers about contract research expenses for R&D credits. They actually did connect me to a real IRS agent in about 2 hours. The agent confirmed that we could claim 65% of our qualified contract research expenses even though we were also deducting them as business expenses. The agent also explained exactly what documentation we need to maintain for contractor expenses - basically proof that the contractors were performing qualified research activities and not just general software development. This was information I couldn't find clearly stated anywhere online. Definitely worth it for getting direct, authoritative answers rather than trying to interpret vague IRS publications.

One important thing nobody mentioned yet - for software R&D credit, make sure your development meets the "process of experimentation" test. This means you need to show you evaluated alternatives through modeling, simulation, or systematic trial and error. Regular software development following established practices doesn't qualify! We got audited last year and the IRS focused heavily on this aspect. They wanted to see documentation of technical uncertainty and how we experimented to resolve it. Just building new software features using known methods wasn't enough, even if the features themselves were new.

Don't forget you need to meet ALL FOUR TESTS for R&D credit: 1) Permitted purpose (creating new/improved functionality) 2) Technical in nature (relies on hard sciences) 3) Technical uncertainty (don't know how to do it from the start) 4) Process of experimentation (systematic evaluation of alternatives) Most software companies fail on #3 and #4. If you know how to build it using existing techniques, it's not eligible even if the software itself is new!

Great discussion everyone! As someone who's been through multiple R&D credit audits, I want to emphasize that documentation is absolutely critical. The IRS doesn't just look at what you claim - they want to see contemporaneous records proving your activities met all four tests. A few practical tips: Start keeping detailed project logs NOW, not when you file your return. Have your developers note when they're experimenting with new approaches versus implementing known solutions. Save failed prototypes and document why they didn't work. Meeting notes discussing technical roadblocks are gold during audits. Also, be conservative with your claims initially. It's better to claim less and be audit-proof than to be aggressive and face penalties. The R&D credit can be carried forward for 20 years, so you're not losing anything by being cautious while you build better documentation systems. One last thing - consider getting a technical memo prepared by a qualified professional that maps your specific activities to the four-part test. This shows the IRS you took the requirements seriously and can be your best defense if questioned.