You started a software company. You hired engineers, built a product, tested features, fixed bugs, and probably spent a lot more on development than you expected.
So, does all that work qualify for the R&D tax credit?
Not necessarily.
The federal R&D tax credit can provide significant tax savings for software startups, including companies that haven't generated a profit. But writing code doesn't automatically qualify as research.
The credit rules focus on what technical problems your team was trying to solve, how they approached those problems, and whether the work involved experimentation.
Here's how to tell which software development activities may qualify in 2026.
01What qualifies as R&D for a software company?
Under Internal Revenue Code Section 41, qualified research generally must satisfy what is commonly called the four-part test.
For 2026, this includes the requirement that the research expenditures be treated as domestic research or experimental expenditures under Section 174A.
You don't need to invent new technology or build something nobody has ever created before. Improving your own software can qualify.
But you do need more than ordinary software implementation.
1. You're developing or improving something
The work must relate to creating or improving a product, process, or software component, generally in its functionality, performance, reliability, or quality.
For example, your engineering team might be:
- Developing a new data-processing system.
- Improving an application to handle significantly more users.
- Building a more accurate recommendation algorithm.
On the other hand, redesigning your website's colors, changing the layout of a dashboard, or adding a standard payment feature typically wouldn't qualify on their own.
2. There was technical uncertainty
At the beginning of the project, your team couldn't be certain how to achieve the desired result, whether it was technically possible, or which design would work.
Imagine your application works well with 1,000 users but starts failing at 100,000.
Your engineers know what they want: a system that handles the additional traffic without slowing down.
What they don't know is how best to accomplish it. They might need to evaluate different database structures, caching methods, or processing architectures.
That's the kind of technical uncertainty that can support an R&D claim.
Compare that with adding a login screen using an established authentication service. Your engineers might spend several days implementing it, but if they're following a known approach without resolving technical uncertainty, the work generally won't qualify.
3. The work relies on technology
The research must rely on principles of computer science, engineering, or another qualifying physical or biological science.
For software companies, this requirement is often relatively straightforward.
Developing an algorithm, testing system architecture, or solving a complex software performance problem can satisfy this requirement.
Testing whether customers prefer a blue or green button generally cannot. That's a question of user preference, not technological research.
4. Your team experimented to find a solution
This is where many software R&D claims become questionable.
Qualified research involves a process of experimentation intended to resolve technical uncertainty.
For example, engineers might test multiple approaches, compare performance results, identify failures, modify the design, and test again.
A project doesn't have to fail to qualify. You also don't have to build dozens of prototypes. But there should be a genuine process of evaluating technical alternatives.
Simply building a feature according to established specifications, then checking that it works, doesn't necessarily meet this requirement.
02Which software development activities are most likely to qualify?
Let's look at examples founders may recognize from their own businesses.
Activities that may qualify
Developing a new algorithm
Your team is building a recommendation engine and needs to determine which approach can produce sufficiently accurate results. Engineers develop and test different algorithms, compare performance, and refine the design.
Solving a scalability problem
Your application slows down as usage grows. Engineers test different database architectures, caching strategies, or processing methods to find an effective solution.
Improving AI model performance
Your team experiments with model architectures, retrieval methods, or other technical approaches to improve accuracy, reliability, or performance.
These activities may qualify when they involve technological uncertainty and a process of experimentation.
Activities that generally don't qualify
Routine feature implementation
Your engineers add standard authentication, billing, or notification functionality using established methods.
Visual redesigns
Your team updates a dashboard layout, changes colors, or improves the appearance of the user interface without resolving technical uncertainty.
Routine maintenance
Your engineers install updates, handle support requests, or fix straightforward bugs using known solutions.
These activities can be important to your business and still fall outside the R&D credit.
Activities that depend on the circumstances
Integrating a third-party API
Connecting your application to an established API using published documentation generally wouldn't qualify.
But suppose the integration requires engineers to develop and test new technical approaches to overcome significant compatibility or performance limitations. Some of that work might qualify.
Fixing bugs
Correcting a simple coding error generally doesn't qualify.
Investigating a difficult system failure when the underlying cause is uncertain, developing competing solutions, and testing those solutions may qualify.
Developing a new feature
Adding a feature isn't automatically R&D. The question is whether the development involved technical uncertainty and experimentation.
Even within one project, some engineering work may qualify while other activities do not.
03What if your engineers use AI to write code?
AI-assisted development introduces an interesting question.
Suppose your engineers use AI tools to generate code, then spend their time testing outputs, evaluating architectures, correcting technical failures, and refining the system.
Can that work qualify?
Potentially, yes.
AI-assisted coding does not change the underlying R&D qualification analysis.
The credit focuses on qualifying research activities, not simply how much code an engineer writes manually.
If your engineers are using AI to help evaluate technical alternatives and resolve uncertainty, their work may qualify.
But using AI to generate a standard feature doesn't turn routine implementation into qualified research.
The important question remains: What technical problems were being solved, and did the work involve experimentation?
04Does software developed for internal use qualify?
Not all software has to be sold to customers to qualify for the R&D tax credit.
However, software developed primarily for a company's internal general and administrative functions, such as financial management, human resources, or support services, generally faces a stricter standard.
For example, building a custom employee expense management system may not qualify merely because your company developed it instead of buying one.
Certain internal-use software can qualify if it satisfies additional requirements involving substantial innovation, significant economic risk, and the lack of commercially available alternatives.
Software developed for customers and software developed primarily for internal administrative operations aren't necessarily treated the same way.
05Can you claim the R&D credit after your product launches?
Yes.
Launching your product doesn't mean your R&D activities are finished.
A software company may continue conducting qualified research when developing new functionality or making technically challenging improvements to an existing product.
For example, rebuilding a processing system to overcome a significant performance limitation could qualify even years after the original product launched.
However, routine maintenance, ordinary troubleshooting, and quality-control testing generally don't qualify.
The credit also excludes research conducted after the beginning of commercial production of the particular business component being evaluated.
The important distinction is between maintaining existing functionality and conducting qualified research on a new or improved component.
06Do overseas software developers qualify for the U.S. R&D credit?
Generally, costs for research physically performed outside the United States, Puerto Rico, or a U.S. possession do not qualify for the federal R&D tax credit.
If your startup has engineers in the U.S. and overseas, you need to distinguish where the research was actually performed.
Paying a foreign developer through a U.S. company doesn't automatically make that developer's work eligible.
When employees perform services in multiple locations, additional allocation rules may apply.
This is particularly important because the tax rules for deducting software development expenses are different from the rules for claiming the credit.
For tax years beginning in 2026:
- Domestic research and experimental costs, including software development costs, generally can be deducted currently under Section 174A, unless the taxpayer elects to amortize them.
- Foreign research and experimental costs generally must be capitalized and amortized over 15 years under Section 174.
A software development expense can therefore be deductible without qualifying for the R&D tax credit.
07How much of your engineers' salaries can you include?
Here's another common misconception: if you have five software engineers, you can automatically include all five salaries in your R&D credit calculation.
That's not how the credit works.
Qualified research expenses may include eligible employee wages, certain contractor expenses, and other qualifying costs.
Suppose an engineer spends part of the year developing and testing an uncertain new algorithm, but also spends time handling support tickets, implementing routine features, and maintaining existing software.
Those activities need to be evaluated separately.
You generally cannot assume the engineer's entire compensation qualifies just because their job title includes "software engineer."
Special rules can allow all of an employee's wages to qualify when substantially all of their services are qualified research services, but this requires evaluating what the employee actually did.
Contractor expenses have additional requirements, and generally only 65% of eligible contract research expenses can be included in the credit calculation.
08Can a startup claim the R&D credit without making a profit?
Yes.
Eligible small businesses may elect to use up to $500,000 of their annual federal R&D credit against employer payroll taxes, subject to applicable limitations.
Among other requirements, the company generally must have less than $5 million in gross receipts for the credit year and no gross receipts before the five-tax-year period ending with that year.
This makes the credit particularly useful for early-stage software startups with significant engineering expenses but little or no taxable income.
The election is made on a timely filed original federal income tax return, including extensions, using IRS Form 6765.
The credit is then claimed through payroll tax filings using Form 8974. It first offsets up to $250,000 of employer Social Security tax per quarter, with the remaining available credit applied against employer Medicare tax. Unused amounts can carry forward to later quarters.
That means even a company eligible for a substantial payroll R&D credit may need multiple quarters to use it.
09What should software founders track during 2026?
If you're planning to claim the R&D credit for 2026, don't wait until tax season to reconstruct what happened.
Your existing engineering records may already contain much of the information needed to support the claim.
Focus on three things:
- Projects and technical challenges. What were you developing, and what technical problems were uncertain?
- Experimentation. Preserve engineering tickets, design discussions, test results, and records of alternatives considered.
- People and costs. Identify who performed the research, where the work was performed, and how much time and expense related to qualifying activities.
You don't need to turn every engineering meeting into a tax documentation exercise. But records created during development are generally more useful than explanations reconstructed months later.
For tax years beginning in 2026, the IRS also generally requires more detailed business-component reporting in Section G of Form 6765.
There are exceptions, including for certain qualified small businesses making the payroll tax credit election and taxpayers meeting the smaller-claim exception.
Even if your company is exempt from Section G, you still need to substantiate the research and expenses claimed.
10Find out what your 2026 software R&D credit could be worth
Building software is a starting point for evaluating R&D eligibility, but it isn't enough by itself.
Your company may have a mix of qualifying research, routine development, and activities that fall somewhere in between.
Once you've identified the work that may qualify, the next step is estimating the credit based on eligible expenses and the applicable calculation method.
[Estimate your 2026 R&D tax credit with Talara's calculator]
Our calculator can help you estimate your potential federal R&D credit. The estimate is a planning tool, not an eligibility determination. A final claim requires reviewing the underlying activities, costs, and supporting documentation.
IRS references
- IRS Instructions for Form 6765: Credit for Increasing Research Activities
- IRS Audit Techniques Guide: Qualified Research Activities
- IRS Qualified Small Business Payroll Tax Credit
This article is general information, not tax or legal advice. The rules are fact-specific, change over time, and depend on details unique to your company. Talk to us about how they apply to your situation.