Question 1

Does SaaS development qualify for R&D tax credits?

Accepted Answer

Absolutely! SaaS development is one of the most common qualifying activities for R&D tax credits. Qualifying activities include:

Product Development: Building new features, modules, and functionality
Technical Architecture: Designing scalable multi-tenant systems
Performance Optimization: Database query optimization, caching strategies, load balancing
Security & Compliance: Implementing encryption, authentication, data protection
Integration Work: Connecting third-party APIs, payment processors, data sources
Mobile Development: iOS/Android apps with complex functionality

Whether you're building B2B SaaS, consumer apps, or enterprise software, your development activities likely qualify. The key is that you're solving technical challenges with uncertain outcomes, which describes most software development.

Question 2

Can we claim R&D credits if we're venture-backed?

Accepted Answer

Yes! Venture-backed companies are fully eligible for R&D tax credits. In fact, VC-backed startups often benefit the most because:

Payroll Tax Offset: Qualified small businesses (less than $5M revenue, less than 5 years old) can apply up to $500,000 of R&D credits against payroll taxes instead of income taxes. This means pre-profitable startups get immediate cash benefit.

Preserve NOLs: Using the payroll tax offset preserves your Net Operating Losses for future profitable years, maximizing long-term tax efficiency.

Investor Appeal: R&D credits demonstrate strong financial management and extend your runway. Many VCs view R&D credit claims as a best practice.

No Impact on Equity: R&D credits are a tax benefit, not dilutive financing. You keep 100% ownership while reducing cash burn.

We've helped hundreds of VC-backed companies from seed stage through Series C claim millions in R&D credits.

Question 3

What documentation do we need to provide?

Accepted Answer

We make documentation easy by working with the systems and records you already have:

Payroll Records:
- W-2s or payroll reports showing developer compensation
- Organization chart identifying technical roles

Project Information:
- Product roadmaps and sprint planning documents
- GitHub/GitLab commit history and pull requests
- Jira/Asana tickets describing technical challenges
- Design documents and technical specifications

Financial Records:
- General ledger for contractor payments and cloud expenses
- AWS/Azure/GCP bills for compute resources

Time Allocation (we help create this):
- We conduct interviews with your dev team
- Use project management data to estimate time on qualifying activities
- Create defensible time studies based on your actual workflows

Most clients spend just 2-4 hours gathering existing documents. We do the heavy lifting of turning them into IRS-compliant documentation.

Question 4

How far back can we claim R&D credits?

Accepted Answer

You can claim R&D tax credits retroactively for the past 3 open tax years (sometimes 4 years). This is one of the most overlooked opportunities:

Amended Returns:
- File Form 1120-X (corporations) or 1040-X (pass-through entities)
- Claim credits for 2021, 2022, 2023, and 2024
- Receive cash refunds for previously paid taxes

Look-Back Analysis:
We reconstruct your qualifying activities from available records:
- Code repository history
- Product release notes and changelogs
- Project management tool exports
- Payroll records and developer roster

Typical Retroactive Benefits:
A software company with $2M in annual developer payroll could claim:
- Year 1: $200,000 credit
- Year 2: $220,000 credit
- Year 3: $250,000 credit
- Total 3-year retroactive benefit: $670,000

Even without perfect documentation, we can build defensible claims using the records you have.

Question 5

Does this affect our GAAP accounting or equity treatment?

Accepted Answer

R&D tax credits are a federal tax benefit and generally do NOT impact your GAAP accounting or equity structure:

GAAP Accounting:
- R&D credits are recorded as a reduction in income tax expense
- Most startups use cash-basis accounting where this is straightforward
- For companies using ASC 740, credits flow through as a tax benefit
- Your auditor may need our documentation for their files

409A Valuations:
- R&D credits are NOT income and don't affect enterprise value calculations
- They improve cash position but don't change equity pricing
- Most 409A providers view R&D credits neutrally

Investor Considerations:
- R&D credits extend runway without dilution
- Can be claimed across multiple funding rounds
- Many VCs encourage portfolio companies to claim R&D credits
- Credits don't affect cap table or ownership percentages

We coordinate with your auditors and accountants to ensure smooth integration.

Question 6

What's the average credit for a software company?

Accepted Answer

Software companies typically claim 10-20% of qualified developer payroll costs as R&D credits:

Small Software Startup (10 engineers):
- Developer Payroll: $1.5M annually
- Qualifying Percentage: 80% (most development work qualifies)
- Qualified Research Expenses: $1.2M
- Federal Credit: $120,000 - $156,000
- California State Credit: $180,000 (15% or 24% for small biz)
- Total Annual Benefit: $300,000+

Mid-Size SaaS Company (50 engineers):
- Developer Payroll: $8M annually
- Qualifying Percentage: 70%
- Qualified Research Expenses: $5.6M
- Federal Credit: $560,000 - $728,000
- State Credit: $300,000 - $500,000
- Total Annual Benefit: $860,000 - $1,228,000

Enterprise Software Company (200+ engineers):
- Developer Payroll: $30M+ annually
- Federal + State Credits: $3M - $5M+

The actual credit depends on your specific activities, team composition, and state location. We've helped software companies claim anywhere from $50,000 to $10M+ in annual R&D credits.

Question 7

Can we claim credits for internal tools and infrastructure?

Accepted Answer

Yes! Internal software development absolutely qualifies for R&D credits, including:

Internal Tools & Platforms:
- Developer tools and productivity platforms
- Internal APIs and microservices
- Data pipelines and ETL processes
- Analytics and reporting dashboards
- Testing frameworks and CI/CD infrastructure

Infrastructure & DevOps:
- Kubernetes orchestration and containerization
- Infrastructure as code (Terraform, CloudFormation)
- Monitoring and observability systems
- Custom deployment automation
- Performance optimization and load testing

Data Science & ML Infrastructure:
- Machine learning pipelines and model training
- Data labeling and annotation tools
- Feature engineering platforms
- Experimentation and A/B testing frameworks

The IRS specifically allows credits for software developed for internal use if it meets the high threshold of innovation test. Most modern DevOps, data engineering, and ML infrastructure work easily clears this bar due to technical complexity and uncertainty.

Question 8

What if we use contractors or offshore developers?

Accepted Answer

Contractor costs CAN qualify for R&D credits, but with some important rules:

U.S. Contractors (1099):
- 65% of contract payments qualify as research expenses
- Must be performing/supervising qualified research
- Need proper contract language establishing your ownership of work product
- We help review/update contractor agreements for compliance

Offshore Contractors/ODCs:
- Generally DO NOT qualify for federal credits
- Work must be performed in the United States
- Exception: If offshore team is supervised by U.S. engineers
- U.S. supervisor wages may partially qualify

Best Practice - Hybrid Model:
- U.S. W-2 engineers: Fully qualifying wages
- U.S. contractors: 65% of payments qualify
- Offshore contractors: U.S. oversight costs may qualify

Example Credit Calculation:
- 20 U.S. W-2 developers: $3M wages → ~$400K credit
- 5 U.S. contractors: $500K payments → ~$42K credit
- 10 offshore developers: $800K → Oversight costs only
- Total Federal Credit: $442K+

Even companies with significant offshore teams can claim substantial credits on their U.S. development activities.

Question 9

Do software companies qualify for cost segregation?

Accepted Answer

Yes! Software companies often have significant cost segregation opportunities, especially if you:

Own Your Office Building:
- Tech campus or headquarters purchase
- Data center facilities
- Mixed-use properties with offices and labs

Major Leasehold Improvements:
- $500K+ build-out in leased space
- Server rooms and network operations centers
- Specialized cooling and electrical systems
- Open office concepts with collaboration spaces

Asset Categories That Accelerate:
- HVAC and specialized cooling (15-year vs 39-year)
- Electrical systems for data centers (15-year)
- Network cabling infrastructure (15-year)
- Flooring, lighting, and interior finishes (5-7 year)

Typical Cost Seg Benefits:
- $5M tech office: $1M-$1.5M in reclassifications
- First-year deduction: $300K-$450K additional
- Tax savings: $75K-$135K immediately

Learn more on our cost segregation page.

Question 10

What's the 4-part test for R&D credits?

Accepted Answer

The IRS requires activities to meet a 4-part test to qualify for R&D tax credits. For software companies:

1. Permitted Purpose:
- Creating new or improving existing functionality, performance, reliability, or quality
- Nearly all software development meets this test

2. Technical Uncertainty:
- Uncertainty about design, methodology, or capability
- "Will this architecture scale to 1M users?"
- "Can we integrate these two complex systems?"
- "How do we optimize this algorithm for real-time performance?"

3. Process of Experimentation:
- Iterative testing and evaluation of alternatives
- Agile sprints, code reviews, A/B testing, prototyping
- Git commits showing multiple approaches
- Performance testing and optimization cycles

4. Technological in Nature:
- Relies on principles of engineering, computer science, or physical/biological sciences
- All software development is inherently technological

What Doesn't Qualify:
- Routine data entry or content updates
- Style/cosmetic changes without technical challenges
- Adaptation of existing commercial software
- Research after commercial production

Most software development passes all 4 tests, especially feature development, architecture work, and performance optimization.

Question 11

Can we combine R&D credits with cost segregation?

Accepted Answer

Absolutely! This is the POWER STRATEGY for software companies with owned or heavily improved facilities:

The Combined Approach:
R&D Tax Credits: Reduce tax on your development activities
Cost Segregation: Accelerate depreciation on your facility
Result: Maximize tax benefits on BOTH operations and real estate

Example: Software Company with $10M Office:

R&D Credits (Annual):
- 50 developers at $150K average = $7.5M payroll
- 75% qualifying work = $5.625M QRE
- Federal R&D Credit: ~$562K
- CA State Credit: ~$420K
- Total R&D Benefit: ~$982K/year

Cost Segregation (One-Time + Ongoing):
- $10M tech office purchase
- Cost seg reclassification: $2.5M to shorter lives
- Year 1 bonus depreciation: $2.5M
- Tax savings (Year 1): ~$625K
- Ongoing savings: $50K-$75K/year

TOTAL BENEFIT:
- Year 1: $1,607,000 ($982K R&D + $625K cost seg)
- Years 2-5: $982,000/year (R&D credits)
- 5-Year Total: $5,553,000

This dual strategy is why we recommend BOTH studies for any software company with significant real estate. Learn more with our R&D calculator and cost segregation calculator.

Question 12

What if we're a startup that's not profitable yet?

Accepted Answer

Pre-profitable startups are IDEAL candidates for R&D tax credits because of the payroll tax offset:

Payroll Tax Offset (QSB Election):
Qualified small businesses can apply up to $500,000 of R&D credits against:
- Employer portion of Social Security taxes (6.2%)
- Medicare taxes (1.45%)
- Total: 7.65% of payroll

QSB Qualifications:
- Less than $5M in gross receipts for current year
- No gross receipts before the 5-year lookback period
- Most seed/Series A startups qualify

Example: Seed Stage SaaS Company:
- Team: 12 engineers
- Annual payroll: $1.8M
- Qualifying work: 85%
- QRE: $1.53M
- Federal R&D credit: $153K
- Payroll tax offset: $137K applied quarterly
- Cash benefit: $34K per quarter for 4 quarters

Why This Matters:
- Immediate cash benefit (not waiting for profitability)
- Extends runway by 3-6 months
- Preserves NOLs for future profitable years
- No dilution unlike venture debt or additional equity rounds

We've helped dozens of pre-profitable startups claim $150K-$500K using the payroll tax offset.

Question 13

Do AI and machine learning projects qualify?

Accepted Answer

AI/ML development is EXCELLENT for R&D tax credits because it's inherently experimental:

Qualifying AI/ML Activities:
- Model architecture design and experimentation
- Feature engineering and data preprocessing
- Hyperparameter tuning and optimization
- Training pipeline development
- Model deployment and inference optimization
- Data labeling tools and annotation systems
- Bias detection and fairness improvements
- MLOps and model monitoring infrastructure

Why AI/ML Is Perfect for R&D Credits:
1. High Technical Uncertainty: "Will this model achieve target accuracy?"
2. Constant Experimentation: Training runs, A/B testing, ablation studies
3. Documented Process: Experiment tracking (MLflow, Weights & Biases)
4. Technological Foundation: Deep learning, statistics, optimization

Expense Categories That Qualify:
- Data scientist and ML engineer salaries
- Cloud compute for training (AWS SageMaker, GCP Vertex AI)
- GPU/TPU infrastructure costs
- Contractors building ML pipelines
- Data labeling and annotation services

Example: AI Startup:
- 8 ML engineers/data scientists: $1.6M payroll
- 90% of work qualifies (heavy experimentation)
- QRE: $1.44M
- Federal credit: $144K
- AWS compute costs: $300K → $30K additional credit
- Total benefit: $174K/year

If you're building AI/ML products, you almost certainly qualify for substantial R&D credits.

Question 14

Can we claim credits for open source development?

Accepted Answer

Open source development CAN qualify for R&D credits, but with important limitations:

What Qualifies:
- Open source code that's part of your commercial product
- Internal tools/frameworks you later open source
- Contributions to open source libraries your product depends on
- Open source components with clear business benefit

What Doesn't Qualify:
- Pure community contributions with no business purpose
- Work funded by grants (already subsidized)
- Research without commercial application

The Business Purpose Test:
The IRS requires a clear business purpose for qualified research. Examples:
- Building an open source library that powers your SaaS product
- Contributing to React/Vue/Angular because your app depends on it
- Creating developer tools that your customers use
- Optimizing open source database drivers for your application

Documentation Requirements:
- Link open source work to commercial product roadmap
- Show business benefit (performance, reliability, features)
- Track time spent on qualifying vs. non-qualifying contributions
- Maintain records of which employees worked on what

Example: Developer Tools Company:
- Company builds CLI tools (open source)
- Monetizes with enterprise features (closed source)
- Open source work qualifies because it's core to commercial product
- 60% of development qualifies for R&D credits

Bottom line: If open source development has a clear connection to your business, it likely qualifies.

Question 15

What if we already claimed R&D credits and got audited?

Accepted Answer

R&D credit audits are relatively rare (less than 2% of claimants), but if audited, proper documentation is key:

What Triggers Audits:
- Large credit claims (>$500K) relative to company size
- Significant year-over-year increases
- Industry risk profiles (IRS targets certain sectors)
- Incomplete or inadequate documentation
- Aggressive assumptions without support

IRS Audit Process:
1. Information Document Request (IDR): IRS requests detailed documentation
2. Technical Interview: IRS engineer interviews technical staff
3. Review Period: IRS evaluates compliance with 4-part test
4. Resolution: Credit sustained, partially reduced, or fully disallowed

How We Protect You:
- IRS-compliant documentation from day one
- Detailed technical narratives with 4-part test analysis
- Time study methodologies that withstand scrutiny
- Ongoing audit support at no additional cost
- Expert witness testimony if needed

Our Audit Success Rate:
- 95%+ of credits sustained upon audit
- Average audit duration: 12-18 months
- Most audits settled without litigation

If You've Been Audited Before:
We can review your previous claims and help you respond to IRS inquiries, even if we didn't prepare the original credit study. Many clients come to us mid-audit for expert support.

Question 16

Do cloud computing costs qualify for R&D credits?

Accepted Answer

Yes! Cloud infrastructure costs used for qualified research activities CAN qualify for R&D tax credits:

Qualifying Cloud Expenses (Supply Costs):
- AWS EC2, Lambda, ECS for development/testing
- Google Cloud Compute, Cloud Run for experimentation
- Azure VMs, App Service for R&D activities
- Database services (RDS, Cloud SQL) used in development
- Storage (S3, Cloud Storage) for test data and artifacts
- ML training compute (SageMaker, Vertex AI, Azure ML)

What Doesn't Qualify:
- Production infrastructure serving customers
- General business operations (email, file storage)
- Non-technical administrative systems

Allocation Methods:
1. Tag-Based: Tag resources by purpose (dev/test vs production)
2. Account-Based: Separate AWS accounts for development
3. Percentage Allocation: Estimate dev/test usage percentage

Example Credit Calculation:
- Total AWS spend: $600K annually
- Development/testing environments: 40%
- Qualifying supply costs: $240K
- Federal R&D credit on supplies: $24K

Documentation Best Practices:
- Maintain separate AWS/Azure/GCP accounts for dev vs prod
- Use cost allocation tags consistently
- Keep records of development activities by environment
- Document major development/testing initiatives

When combined with developer wages, cloud costs can add 5-15% to your total R&D credit claim.

Question 17

What's the difference between R&D credits and cost segregation?

Accepted Answer

R&D tax credits and cost segregation are COMPLETELY DIFFERENT tax strategies, but both benefit software companies:

R&D TAX CREDITS:
What: Tax credit for research and development expenses
Applies To: Software development, engineering work, technical innovation
Benefit: Dollar-for-dollar reduction in tax liability (or payroll taxes)
Annual: Claim every year based on qualifying activities
Expenses: Wages, contractor costs, cloud computing, supplies
Typical Software Benefit: $100K-$2M+ per year
Learn More: R&D Tax Credit Calculator

COST SEGREGATION:
What: Accelerated depreciation study for buildings/improvements
Applies To: Owned buildings, leasehold improvements ($500K+)
Benefit: Front-loads depreciation deductions (reduces taxable income)
One-Time: Performed once per property (with updates for renovations)
Expenses: Building components (HVAC, electrical, finishes)
Typical Software Benefit: $200K-$1M in Year 1 deductions
Learn More: Cost Segregation Calculator

COMBINED POWER STRATEGY:
Software companies with owned facilities or major leasehold improvements should pursue BOTH:
- R&D credits for development activities (ongoing)
- Cost segregation for facility/build-out (one-time)
- Combined benefit can exceed $2M in first year

See our industries page for more on how these strategies work together.

Question 18

How long does the R&D credit study process take?

Accepted Answer

Most R&D tax credit studies for software companies take 4-6 weeks from start to finish:

Week 1: Discovery & Data Collection
- Kickoff call with your team
- Review organizational structure and technical roles
- Gather payroll data, org charts, project lists
- Request access to GitHub/GitLab, Jira, project management tools
- Estimated time from your team: 2-3 hours

Week 2-3: Technical Interviews & Analysis
- Interview 3-5 key technical team members (30-60 mins each)
- Review code commits, feature releases, technical documentation
- Analyze project management data for qualifying activities
- Conduct time studies and allocation analysis
- Estimated time from your team: 3-4 hours total

Week 3-4: Credit Calculation & Documentation
- Build technical narratives documenting 4-part test compliance
- Calculate qualified research expenses (QREs)
- Run both Regular Credit and ASC methods
- Prepare IRS Form 6765 and supporting schedules
- No time required from your team

Week 4-6: CPA Coordination & Filing
- Present findings to your CPA/tax preparer
- Coordinate integration with tax return
- Finalize documentation for IRS support
- Provide ongoing audit defense resources
- Estimated time from your team: 1 hour review

Total Time Investment:
- Your CFO/Controller: 4-5 hours
- Technical team: 3-5 hours total
- Timeline: 4-6 weeks
- Benefit: $100K-$2M+ in tax savings

Expedited Process Available:
If you need credits for an approaching tax deadline, we can complete studies in 2-3 weeks with priority scheduling.

Question 19

Can we claim credits for mobile app development?

Accepted Answer

Absolutely! Mobile app development is HIGHLY qualifying for R&D tax credits:

iOS Development (Swift/SwiftUI):
- Complex UI/UX implementations
- Core Data and database optimization
- Network layer and API integration
- Performance optimization and memory management
- Push notifications and background tasks
- Camera, sensors, and hardware integration
- App Store optimization and compliance

Android Development (Kotlin/Java):
- Material Design custom components
- Room database and SQLite optimization
- Jetpack Compose experimentation
- Multi-device compatibility (phones, tablets, wearables)
- Location services and mapping integration
- Payment gateway integration

Cross-Platform (React Native/Flutter):
- Custom native modules development
- Performance optimization across platforms
- Platform-specific UI/UX implementations
- Bridge development for native features
- State management architecture

Backend & API Development:
- RESTful and GraphQL API design
- Real-time data synchronization
- Push notification systems
- Authentication and authorization
- Cloud infrastructure and scaling

Why Mobile Development Qualifies:
- High technical uncertainty (platform limitations)
- Constant experimentation (A/B testing, beta programs)
- Performance constraints (battery, memory, network)
- Platform-specific challenges (iOS vs Android differences)

Example: Consumer Mobile App:
- 5 iOS developers: $750K
- 5 Android developers: $750K
- 3 Backend engineers: $450K
- 2 DevOps engineers: $300K
- Total qualifying payroll: $2.25M
- 80% of work qualifies: $1.8M QRE
- Federal R&D credit: $180K-$234K

Mobile app development typically has one of the HIGHEST qualification rates (70-85%) because of constant technical challenges.

Question 20

What about blockchain and Web3 development?

Accepted Answer

Blockchain, cryptocurrency, and Web3 development are EXCELLENT for R&D tax credits due to high complexity:

Qualifying Blockchain Activities:
- Smart contract development and testing
- Consensus mechanism design and implementation
- Cryptographic protocol development
- Layer 2 scaling solutions (rollups, sidechains)
- Cross-chain bridge development
- Wallet integration and security
- Gas optimization techniques
- DeFi protocol development
- NFT marketplace and minting infrastructure
- Blockchain indexing and querying systems

Web3 Frontend Development:
- Web3.js/Ethers.js integration
- MetaMask and wallet connection
- Transaction signing and confirmation UX
- Real-time blockchain data visualization
- Decentralized identity systems

Infrastructure & DevOps:
- Node infrastructure (Ethereum, Solana, Polygon)
- RPC endpoint optimization
- Blockchain event monitoring
- Custom indexing solutions (subgraphs)
- Testing frameworks (Hardhat, Foundry)

Why Web3 Is Perfect for R&D Credits:
1. Cutting-Edge Technology: Constantly evolving standards
2. High Uncertainty: "Will this work across chains?"
3. Security Challenges: Smart contract vulnerabilities and audits
4. Performance Issues: Gas costs, transaction speed, scalability

Example: DeFi Protocol:
- 8 Smart contract developers: $1.6M
- 4 Frontend engineers: $600K
- 3 Security/DevOps: $450K
- 2 Backend engineers: $300K
- Total payroll: $2.95M
- 85% qualifies (high uncertainty): $2.5M QRE
- Federal credit: $250K-$325K
- State credit: $150K-$300K
- Total benefit: $400K-$625K/year

Web3 companies often have qualification rates of 80-90% because nearly everything involves technical challenges and experimentation.

Software Companies

Unlock Hidden Tax Savingsin Your R&D

Why Software Companies Are Perfect for R&D Tax Credits

Development Activities Qualify

Immediate Cash Benefit

The Combined Power Strategy for Software Companies

R&D Tax Credits

Cost Segregation

Are You Leaving Money on the Table?

"Our developers write code, but we don't do 'research'"

"We thought R&D credits were only for pharma and biotech"

"The paperwork seems too complex and time-consuming"

"We're not sure if our work qualifies"

What Software Development Actually Qualifies

New product features and functionality

Algorithm development and optimization

Integration with third-party systems

Performance improvements and scaling

Bug fixes for complex technical issues

Cloud architecture design

Database optimization

Security enhancements

Tech Infrastructure Assets That Accelerate (Cost Segregation)

Data Centers & Server Rooms

Network Infrastructure

Specialized Electrical Systems

Tech Office Build-outs

Lab & Testing Facilities

NOC & Operations Centers

Tax Strategy by Office Type

Tech Campus

Co-working Spaces

Remote-First

Hybrid Tech Hub

Real ROI Examples by Company Stage

Seed Stage SaaS Startup

Series A Growth Company

Series B with Office Build-out

Profitable Enterprise SaaS

Common Mistakes Software Companies Make

Waiting Until Profitable

Not Claiming Retroactively

Overlooking Cloud Costs

Ignoring Offshore Teams

DIY Documentation

Missing Cost Segregation

See Your Potential Savings

How We Maximize Your R&D Credits

Discovery: Review Your Development Activities

Documentation: We Handle All IRS Documentation

Calculation: Maximize Qualifying Expenses

Filing: Seamless Integration with Your Tax Return

R&D Tax Credits for Software - Frequently Asked Questions

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