Does My Software Company Qualify for the R&D Tax Credit?

Owedco  ·  Updated for the 2026 tax year  ·  6 min read

Short answer: probably yes. The longer answer explains why most software founders say no before they've even looked.

The federal R&D tax credit was written in 1981 to reward American businesses that invest in developing something new. For the first twenty years, "R&D" mostly meant pharmaceutical labs and aerospace engineers. Then software ate the world — and the IRS quietly updated its guidance to confirm that software development qualifies too.

That update happened over a decade ago but the perception never caught up. Most software founders still think "R&D credit" means white coats and test tubes — so they never check and they leave money on the table every year.

What the IRS actually requires

The credit is governed by what the IRS calls the four-part test. Your activity needs to pass all four parts. Here they are without the jargon:

1. It has to be technological. The work must rely on engineering, computer science, biology, chemistry or a related hard science. Writing marketing copy doesn't qualify. Building the product that delivers it might.
2. It has to involve experimentation. You need to be testing and evaluating different approaches — not just executing a known solution. If you knew exactly how you'd build it before you started, it doesn't qualify. If you tried three approaches before finding one that worked, it probably does.
3. The uncertainty has to be technical, not business. "Will customers buy this?" is a business question. "Can we build this fast enough to handle 100,000 concurrent users?" is a technical question. Only the second one counts.
4. It has to be aimed at something useful. The development needs to be directed at creating or improving a product, process, software, technique, formula or invention. Almost all software development clears this bar easily.

What specifically qualifies for a software company

You don't need to be building AI or doing pure research. Here's what the IRS has consistently ruled qualifies for software businesses:

• Developing new features that required technical problem-solving
• Building internal tools your team relies on
• Migrating or re-architecting systems (when it wasn't straightforward)
• Performance work — optimising for scale, speed or reliability
• Security research and implementation
• API development and third-party integrations that required iteration
• Data pipeline and processing work
• Writing and testing algorithms
• Failed prototypes and abandoned approaches — these count too

The time your engineers spent on these activities — plus contractors you paid for the same — goes into calculating your credit.

What doesn't qualify

To be fair, not everything in a software company counts. The IRS specifically excludes:

• Bug fixes for existing, working software (when there's no technical uncertainty involved)
• UI or design work that doesn't involve technical experimentation
• Business analysis, market research or project management time
• Adapting existing software to a new customer's environment without any novel development
• Software developed outside the United States

In practice, most companies have a mix. A specialist will work through your team's actual activities and identify what's in and what's out.

How much could you actually get back

The credit is calculated as roughly 6–8% of your qualified research expenses. Those expenses include:

• Wages for employees doing qualifying work (typically your engineering team)
• Contractor costs for qualifying work (65% of what you paid them)
• Supplies directly used in development (cloud computing costs often count here)

So if your engineering team costs you $800,000 a year and they spend 70% of their time on qualifying development work, your qualified expenses are around $560,000. At 7%, that's a $39,200 credit — dollar for dollar off your tax bill, not just a deduction.

If you're a startup under five years old with under $5M in revenue, you can apply up to $500,000 of that credit against your payroll taxes instead — which means you see the benefit as actual cash, even before you're profitable.

The one thing that trips most companies up

Documentation. The IRS requires contemporaneous records — meaning notes made at the time, not reconstructed afterward. Time logs, Jira tickets, GitHub commit messages, design docs, architecture notes, Slack threads — all of this counts. Most software companies already have it. They just haven't organised it with this purpose in mind.

A specialist will walk you through exactly what to pull together. The first review is free and you won't owe them anything unless they recover money for you.

This article is for informational purposes only and does not constitute tax or legal advice. R&D credit eligibility depends on your specific activities and qualified expenses. Consult a qualified tax professional before filing any credit claim.