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Narrowed “internal use software” definition is good news for many

October 19, 2015 / 2 min read

This narrower definition of IUS will likely have a positive effect on taxpayers looking to claim the R&D credit related to software development activities.

Historically, it’s been difficult for internal use software (IUS) to meet the stringent criteria to qualify for a research and development (R&D) tax credit. That hasn’t changed.

Back in January, however, the IRS released guidance that narrowed the definition of what’s considered to be IUS. This will likely have a positive impact on taxpayers looking to claim the R&D credit related to their software development activities.

A quick refresher on the R&D credit

To qualify for the R&D credit, an activity must meet four criteria:

Software considered to be IUS must meet all of these criteria plus all of these higher threshold requirements to qualify for the credit:

That’s a tall order. No wonder IUS rarely qualifies.

But IUS no longer includes…

The new rules expand the definition of software to say that software “sold, leased, licensed, or otherwise marketed to third parties” is not considered IUS. They go on to exclude software that enables the business “to interact with third parties.” Examples may include software developed to execute mortgage loans, purchasing tickets for entertainment, and customer tracking the delivery of goods. This narrower definition allows items formerly considered IUS to qualify more easily for the R&D credit.

So what is IUS?

The new rules provide some clarification around what types of software should be classified as IUS by stating that the designation should apply to software developed “for use in general and administrative functions,” such as financial management, human resources, and support services that target the back-office functions necessary for nearly every organization to operate.

In conclusion

These new rules will have a positive outlook for many businesses. To learn more about the IUS regulations, check out our recent webinar, "Sharpen Your Focus on Internal Use Software R&D Regulations" >>

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