Industries · SaaS & Software

R&D tax credit for SaaS & software companies

If your engineers are building new features, novel algorithms, AI/ML systems, or scaling and securing a platform, you’re likely doing qualified research — and likely leaving credit on the table. Software teams are among the most common to underclaim. A Ricerca study captures it with documentation that holds up.

Why software development qualifies

Each new or improved release is a business component — a product, software, or technique you’re trying to make better. The work qualifies when your team faces genuine technical uncertainty about architecture, algorithms, performance, scale, or security and resolves it through a systematic process of experimentation: designing alternatives, prototyping, and testing.

Every qualifying activity must pass the IRC §41 four-part test — permitted purpose, technological in nature (here, the principles of computer science), elimination of uncertainty, and a process of experimentation. Routine configuration, content changes, and bug fixes after release don’t qualify; the genuinely uncertain engineering does.

Software firms underclaim for predictable reasons: the work feels like “just building the product,” time isn’t tracked against the four-part test, and generalist preparers skip it. Mapping each activity to the statute — with contemporaneous evidence — is exactly what turns everyday engineering into a defensible claim.

Qualifying activities

The software work that commonly qualifies

Representative activities we see meet the four-part test. The label matters less than the underlying technical uncertainty and experimentation.

New features & architectures

Designing and building new product capabilities or re-platforming when the right technical approach isn’t known up front.

Novel algorithms & data structures

Developing algorithms, data models, or indexing and caching strategies to meet functional or performance goals.

AI/ML model development

Building, training, fine-tuning, and evaluating models, pipelines, and inference systems to resolve modeling uncertainty.

Performance & scalability engineering

Engineering for throughput, latency, concurrency, and scale when existing patterns won’t meet the target.

Security engineering

Designing authentication, authorization, encryption, and isolation to resolve technical security challenges.

DevOps & infrastructure-as-code

Developing automation, CI/CD, and infrastructure-as-code where the implementation requires experimentation.

Complex integrations

Building non-trivial third-party, API, and system integrations that require resolving interface and data uncertainty.

Prototypes & POCs

Experimental prototypes and proofs-of-concept that evaluate alternatives before committing to a design.

Platform re-architecture

Re-architecting systems for reliability, maintainability, or scale when the path forward is genuinely uncertain.

Qualified Research Expenses

Typical QRE categories for software

What spending counts toward the credit — tailored to how software teams actually spend.

Technical wages

W-2 wages for engineering, QA, DevOps, and technical product staff for time spent on qualified development, supervision, and direct support.

§41(b)(2)(A)–(B)

Cloud & compute

Amounts paid to rent cloud and compute for development, test, staging, and model-training environments used in qualified research.

§41(b)(2)(A)(iii)

Contract development (65%)

65% of amounts paid to U.S. third-party developers and agencies for qualified development performed on your behalf.

§41(b)(3)

Supplies

Limited for software teams — tangible property consumed in research, not depreciable equipment or overhead.

§41(b)(2)(C)

Don’t forget §174A

Software development is fully deductible again

New IRC §174A restores immediate, full expensing of domestic research & experimental costs for tax years beginning after December 31, 2024 — and domestic software development is explicitly included. Captured alongside the §41 credit, you get the deduction and the credit, correctly.

Understand §174A

Illustrative example

What a software study can look like

A hypothetical scenario to show how the pieces fit together. It is not a quote, projection, or promise of results.

~40-person SaaS company

Illustrative

Engineering payroll: $3.2M
Share on qualified development: ~60%
Cloud & compute (dev/test/training): $300K
Estimated QRE: ~$2.2M
Illustrative federal credit: ≈ $130K–$220K

Plus the full §174A first-year deduction on domestic R&E, including software development.

Illustrative only. Figures are hypothetical and rounded; the federal credit commonly works out to roughly 6–10% of QRE depending on method and filing history. Your result depends entirely on your facts. This is not a quote or a guarantee.

FAQ

SaaS & software — frequently asked questions

Does building features for our own product count?

Generally yes, when the work meets the four-part test. Customer-facing SaaS sold or licensed to others is generally not treated as “internal-use software,” so it isn’t subject to the higher internal-use threshold — what matters is whether you were resolving genuine technical uncertainty through a process of experimentation.

Does AI/ML development qualify?

Often. Designing, training, fine-tuning, and evaluating models and the surrounding data and inference pipelines typically involves real modeling, performance, and capability uncertainty resolved through systematic experimentation — squarely within the spirit of the four-part test.

Do cloud and compute costs count?

Yes. Amounts paid to rent or lease computing — including cloud and compute used for development, testing, and model training in qualified research — are an eligible QRE category under §41(b)(2)(A)(iii).

Do offshore developers count?

No. Only qualified research performed in the United States can be claimed. Contract research counts at 65% of the amount paid under §41(b)(3), and the work must be U.S.-performed; research conducted outside the U.S. is excluded.

Does §174A really cover software development?

Yes. Domestic software development costs are explicitly treated as research & experimental expenditures eligible for immediate expensing under §174A — see our Section 174A guide. A well-run study captures both the deduction and the credit.

We’re pre-revenue — can we still benefit?

Possibly. A qualified small business may elect to apply up to $500,000 per year of R&D credit against payroll taxes, turning qualified development spend into near-term cash even before owing income tax. Contact us to discuss your facts.

See what your engineering qualifies for

Tell us about your product and stack, and we’ll map your qualifying development to the four-part test — including §174A software expensing — reviewed and finalized by R&D experts and backed by Audit Protection. Contact us for pricing tailored to your study.