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What is the Scope and Application of the Final Treasury Regulations Governing Internal Use Software ("IUS") R&D Tax Credit Claims?

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Peter J. Scalise
The Internal Revenue Service (hereinafter “the Service”) issued Final Treasury Regulations in October of 2016 setting forth guidance on research and development efforts in connection to Internal Use Software (hereinafter “IUS”) for purposes of claiming the Research & Development Tax Credit (hereinafter “RTC”) under I.R.C. § 41.

As a synopsis, the newly issued Final Treasury Regulations are substantially the same as the previously issued Proposed Treasury Regulations which were issued on January 20th of 2015(REG-153656-03). The previously issued Proposed Treasury Regulations were intended to provide a practicable definition of IUS while offering guidance for when IUS development satisfies the high threshold of innovation test required in order for IUS to qualify for the RTC. As it should be recalled, the previously issued Proposed Treasury Regulations were praised by tax professionals as a practical framework to identifying, gathering, and documenting IUS RTC claims. Consequently, it was not surprising that the regulations were later finalized in substantially similar form.

The Final Treasury Regulations are prospective only. The Final Treasury Regulations will apply to taxable years beginning on or after October 4, 2016. For tax years ending on or after January 20, 2015, and beginning before October 4, 2016, the Service will not challenge any RTC claim that is consistent with the Proposed Treasury Regulations or the Final Treasury Regulations. The Final Treasury Regulations can be accessed at:www.federalregister.gov/documents/2016/10/04/2016-23174/credit-for-increasing-research-activities

For the full scope and application of the Final Treasury Regulations, please consult my published article entitled “The Service Issues Final Treasury Regulations Governing R&D Tax Credit Claims” www.taxconnections.com/taxblog/the-service-issues-final-treasury-regulations-governing-rd-tax-credit-claims/#.V_we7PkrJD8
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