Main Issue:
Internal Use Software / Process of Experimentation
Facts:
The taxpayer claimed the research credit for the implementation and customization of an ERP system
IRS argued that the research failed to meet the Uncertainty Test, Process of Experimentation test, and exception for IUS tests
Conclusion:
The court rejected the taxpayer’s claim that the implementation and customization of a third-party ERP involved Uncertainty or a Process of Experimentation
Only the original developer of the software (J.D. Edwards) would have Uncertainty at the outset of the research
Take-Away Point:
Taxpayer needs to establish that it engaged in a process of experimentation and the uncertainty existing at the outset of the research
Customization of third-party software (especially financial software) will rarely qualify for the research credit if no related proprietary software development
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