IRS Internal-Use Software Guidance Reflects New World of Online Business

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Jan. 29 — The IRS is reflecting the changing world of technology in new guidance that updates the definition of internal-use software so that more consumer-facing software will be eligible for the research and development tax credit, experts told Bloomberg BNA in a series of interviews.

“The IRS is acknowledging that the world has evolved,” William A. Schmazl, a partner in the tax controversy practice at Mayer Brown LLP, said Jan. 21. The rules show the agency's recognition that consumer interaction with the Internet “was the part of our economy that was growing most dramatically. Many, many more software projects will be judged on the same standard as other consumer-facing products,” he said.

The new proposed regulations (REG-153656-03) mean a vast amount of software used to power sites designed to allow customer interaction generally won't be considered internal-use software that doesn't qualify for the credit, practitioners told Bloomberg BNA.