By: Betsi Barrett | 09/13/18
Enterprise Resource Planning (“ERP”) has become an integral component of the manufacturing process as it can provide insight on vendor management, product logistics and server integration. Taxpayers may be able to qualify time for the R&D tax credit associated with developing and integrating the ERP system depending on whether it is developed primarily for internal or external use. Internal use software is developed primarily for general and administrative functions, human resource management, and support services. When qualifying internal use software, it must meet the IRS 4-part test along with the high threshold of innovation test. However, if software is developed to interact with third parties or to allow third parties to review data or initiate functions on a taxpayer’s system, it is considered external use and only needs to meet the IRS 4-part test.
Further, whether a project is deemed internal use depends on the intent of the taxpayer at the beginning of the software development project.
Innovative (Unique or Novel): The regulations deem software innovative if the software is intended to be unique or novel and is intended to differ in a significant or inventive way from prior software implementations or methods such that it would result in a reduction in cost or improvement in speed.
Significant Economic Risk: The software development must involve significant economic risk in that the taxpayer commits substantial resources to the development and there is a “substantial uncertainty”, technical risk, that such resources would be recovered within a reasonable period.
Commercial Availability: The software cannot be purchased, leased or licensed and used for the intended purpose without modifications.
In general, the following activities are deemed not qualified in relation to the implementation of an ERP system:
Examples that could be considered qualified include the following:
Qualifying time devoted to implementing an ERP system can be complex so it is important to reach out to your tax advisor to discuss specific qualification related to your program. If you have any specific questions, please contact Betsi Barrett or Nina Desai by calling 770.396.2200.
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