The role of computer software in business activities has greatly changed from when the original internal use software (IUS) rules were issued in 1986; a fact to which the IRS agrees. Recent IRS regulations focus on IUS, that is software developed by the taxpayer for use in general and administrative tasks that aid and support the conduct of the taxpayer’s business. The IRS has finally recognized that the old research credit regulations covering IUS are outdated. Accordingly they have released new proposed regulations regarding this type of software.

Why is this important for taxpayers?

Since the original research credit rules did not allow the inclusion of costs incurred to develop IUS, many taxpayers will find the new regulations more financially beneficial.

As mentioned before, IUS is developed to aid in general and administrative functions that support the taxpayer’s business. On January 16, 2015, the IRS released a long awaited update of its definition of IUS, making clear that general and administrative functions are now limited to back office type activities like:

• Financial management functions
• Human resource management functions
• Support services functions

Therefore, software that:

• allows a taxpayer to communicate with third parties or
• enables third parties to evaluate data on the taxpayer’s system, or initiate functions on the system does not fall under the new definition because this type of software does not exclusively benefit the taxpayer who develops it.

For taxpayers involved in third-party-facing software development, the proposed regulations are clearly advantageous. For more information, contact any member of our Tax Services Team.