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Expenses cease to qualify once the developed product goes into commercial production.
Indeed, even after commercial production begins, projects aimed at developing new enhancements for a product may qualify for the credit if the enhancement project otherwise meets the other requirements described above. The substantiation burden on taxpayers in audits of tax credits has recently been made more difficult by an aggressive approach utilized by IRS agents and engineers reviewing this issue. In particular, relying on two recent cases and on the language of proposed regulations, IRS agents and engineers have begun to deny the credit for both external and internal software development projects on an increasing basis. As a consequence, we are heavily involved in assisting clients in the defense of their tax credit claims in software development cases. In our experience, when the examining IRS agent or engineer focuses on whether the legal requirements of discovery or experimentation have been met, the taxpayer must be prepared to make a complete and compelling presentation of the relevant factual issues to support the credit.