In a recent development, the Internal Revenue Service (IRS) has published guidance regarding the taxation rules applicable to software development and research expenses. The movement hopes to clarify and streamline the proceedings in the backdrop of the Tax Cuts and Jobs Act of 2017 (TCJA) which largely altered the tax treatment of specified research and experimentation (SRE) expenses.
Prior to the changes proposed by the TCJA, businesses were able to instantly offset all costs associated with research and experimentation activities per the Internal Revenue Code (IRC), Section 174. The permissible deductions included expenses linked to laboratory research, software development, and contractual research performed by either third-party entities or affiliated research bodies.
The fresh rules and guidance put forward by the IRS, as indicated in the alert by Cooley LLP, seeks to delineate the application of tax laws on different components and stages of software development, while also clarifying the approach towards research-related expenditures.
Legal professionals and corporate entities need to stay vigilant about these changes, which will invariably impact the overall financial planning and taxation processes of conducting research and development activities, especially as they pertain to several areas of technology and software.
Furthermore, companies undertaking collaborations with external entities for research purposes may need to revisit their current contractual agreements and tax plans to ensure compliance with these revised regulations. With these changes, the IRS hopes to present a clear and comprehensive approach to possible deductions and stipulations concerning research and software development costs.