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Internal-Use Software

By Manuel Garcia-Linares and George L. Metcalfe, Jr.

The tax credit for research and development (R&D) of internal-use software under Section 41 of the Internal Revenue Code has been the subject of many concerns regarding the current tax code. The R&D tax credit has been renewed 16 times since its implementation in 1981. The most recent renewal occurred on Dec. 19, 2014, when President Obama signed into law the Tax Increase Prevention Act, which called for a one-year extension of the tax credit and applied it retroactively from Jan. 1, 2014, until Dec. 31, 2014. Currently, the R&D tax credit has not been extended beyond calendar year 2015.

Many business leaders and commentators have called for this tax credit to become permanent. They argue that the temporary status of the credit has had two main effects. First, companies have faced a tremendous amount of uncertainty in calculating the after-tax cost of their R&D investments, and often have to commit to these investments long before they know whether the credit will be extended. Second, the credit has gotten lumped in with a wide variety of other tax provisions, including an important provision on Medicare reimbursement that expires on a regular basis.

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