That doesn't make sense since there is both greenfield development and maintenance development. By this logic we would have to track our hours and write down when we do maintenance work and when we do R&D.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers.
Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
" “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
and
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D.
There is no consideration in the law as written for categorizing software development differently.
That's the reason this whole scenario is a problem in the first place.