17 Jul 2024
Is the development of software eligible for funding under the Research Allowance Act?
The development of software can be eligible for funding under the Research Allowance Act (FZLG). However, this is a complex process that requires precise delineation.
In principle, software development projects that involve genuine research and development work can be funded. This includes innovative solutions and technological advancements that go beyond the current state of the art.
However, software developments that are limited to standard applications or the support of existing systems are not eligible for funding. These activities are considered routine developments and not research and development projects within the meaning of the FZLG.
For companies, this means that a thorough examination and documentation of project contents is necessary to determine eligibility for funding.
At Innoscripta, we have already successfully obtained approval for numerous projects and therefore possess extensive experience and expertise in this field. Let us advise you to optimally utilize your funding opportunities.
You Might Also Like
17 Aug 2026
IP Box in France: Recent court rulings
What does the IP Box involve?The "IP Box" is a tax mechanism provided for in Article 238 of the General Tax Code (CGI) that allows a reduced tax rate of 10% to be applied to income derived from the exploitation of certain intellectual property rights, particularly in the context of licensing agreements.In the case of software, the company must demonstrate that the asset is protected by copyright and calculate the eligible income. The option is exercised on a per-fiscal-year basis (whether to opt in or maintain the election) and is formalised by filing a specific schedule.Judgment of the Administrative Court of Cergy-Pontoise, 5th Chamber, 29 January 2026, No. 2308638In this case, the taxpayer—a company specialising in the development of telecommunications products and services—filed amended tax returns serving as formal claims to benefit from the special reduced tax rate of 10% provided for under Article 238 (the so-called "IP Box" regime). The tax authorities rejected the request on the grounds that the option had to be exercised in the initial tax return and could not be claimed retroactively via an amendment.The judges held that Article 238 of the General Tax Code (CGI) specifies no deadline for electing this regime and that no law requires the submission of the supporting schedule at the same time as the initial return. Consequently, the court upheld the right to make such a claim, provided it was filed within the general time limit set out in Article R. 196-1 of the Book of Tax Procedures. Noting that the company had provided sufficiently detailed documentation and that the tax authorities did not dispute the calculation of net income, the court authorised the application of the reduced rate and granted the discharge of the tax liability.This decision confirms earlier rulings handed down on this matter during 2025.Key takeawayRetroactive option: The IP Box regime may generally be elected retroactively by filing an amended tax return or a tax claim, provided that the statutory deadlines under Article R. 196-1 of the French Tax Procedure Code are met.As a general rule, the amendment must be submitted no later than 31 December of the second year following the year in which the relevant corporate income tax was paid. The decisive date is therefore not only the financial year concerned, but also the year of the tax payment.For example, if the corporate income tax for the 2023 financial year was paid in 2024, the deadline for filing the amendment would generally be 31 December 2026.Judgment of the Administrative Court of Poitiers, 1st Chamber, 17 March 2026, No. 2301859The publisher of the accounting software Macompta.fr simultaneously applied for the IP Box regime and the innovation tax credit (CII) for the 2020 and 2021 financial years. The tax authorities rejected both claims. The courts examined each claim separately and ruled in favour of MACOMPTA regarding the IP Box aspect.Below are the key takeaways from the ruling by the Administrative Court of Poitiers concerning the IP Box regime.Key takeawaysProof of prior existence: Depositing source code with a trusted third party (such as the APP, a judicial officer, or a certification authority) serves as useful evidence to demonstrate prior existence and ownership of rights. While such a deposit is not sufficient on its own to establish the software's originality, it helps substantiate the claim that the asset is an original creation of the company and qualifies for copyright protection;Revenue allocation: Where subscription revenue comprises both a software licensing component and service elements (hosting, maintenance, support, etc.), an allocation method based on costs incurred during the financial year is acceptable. This methodology involves distinguishing between costs associated with non-eligible services and costs directly linked to the development and operation of the eligible software. The resulting ratio allows revenue to be apportioned between the share eligible for the IP Box regime and the share corresponding to non-eligible services;Option to elect by asset family: If multiple intangible assets (software modules) generate inseparable revenue (e.g., a global subscription) and the specific contribution of each cannot be reliably determined, the company may elect to apply the IP Box regime at the level of an asset family (e.g., a software suite). Eligible income is then calculated on an aggregate basis for the grouped assets, provided the company can justify their complementarity and the impossibility of meaningful individual tracking.
05 Aug 2026
Strategic defense of US R&D tax credits under Section 41
A comprehensive guide for CFOs and tax leaders in the 2026 regulatory environmentAs the Internal Revenue Service (IRS) sharpens its scrutiny of R&D tax credit claims, defending these claims under Internal Revenue Code (IRC) Section 41 is becoming a top priority for financial leadership. The R&D tax credit is a central federal incentive for innovation, and it is characterized by an in-depth audit process and carries a substantial risk of disallowance and a prolonged application process if the claim is not backed by accurate and contemporaneous documentation.Presently, in 2026, organizations must focus beyond the retrospective documentation of innovative projects and adopt streamlined and technology-driven processes to align with predefined regulatory mandates.The following elaborates on the 2026 compliance ecosystem and depicts how innoscripta and Clusterix software enable companies to maximize credit value while mitigating risk.I. The Evolving Regulatory Landscape (2026)The compliance requirements for the R&D tax credit have undergone an important shift, moving from an elaborated summary to mandatory granular disclosures of R&D project expenditures. For decades, the R&D tax credit was often seen as a “study-based” exercise by the tax department, which could also be performed months or years after the completion of the relevant R&D work. However, in the present landscape, the IRS has systematically ended this retrospective approach of presenting project details at one’s convenience, and the focus is now placed on the immediate documentation of R&D projects to ensure utmost accuracy in cost calculations and claims, along with the transparent representation of the R&D project to qualify for R&D tax credit benefits.1. Mandatory Section G reportingStarting in 2026, Section G of Form 6765 is no longer optional for the majority of taxpayers. This change represents one of the most important administrative shifts in how the R&D tax credit was treated. Previously, Form 6765 allowed for a high-level aggregation of Qualified Research Expenses (QREs), but as per the new rule, the IRS needs a deep level of clarity for claims, which calls companies to perform a full project-by-project audit before filing their tax returns.Business component identification: Taxpayers are required to identify every specific product, process, or software being explored for improvement, and merely grouping them into broad categories is not sufficient. For example, a software firm with a development project cannot simply depict the work as ‘Platform Optimization’ as a single line item. They should be able to present accurate details by breaking down the specific modules, algorithms, or architectural components.QRE allocations: Companies should produce a detailed breakdown of QREs (Qualified Research Expenses), which includes wages or salaries, supplies, and/or contract research for each R&D activity. This requirement demands a clear connection between cost records and project documentation.Executive accountability: Due to the project-specific disclosure requirements, high-risk claims are more quickly flagged by the IRS. As the IRS also employs automated risk-assessment algorithms, the Section G data fed into the system leads to the immediate flagging of outliers in wage-to-supply ratios or suspiciously vague component descriptions.2. The five-item specificity requirement for refund claimsThe landscape of claiming tax credits and refunds has become even more demanding. As clarified in IRS Chief Counsel Memorandum (CCM) 20214101F, any refund claims must provide five essential facts at the time of filing. Failing to provide any one of these items can lead to disallowance without taxpayers getting an opportunity to fix the defective claim.The five required elements are:Identification of all business components of the R&D project involved in the claim.All research activities performed for each business component.Specific individuals (or their titles/positions) who performed each research activity.The technical information each individual sought to discover.Total QREs (wages or salaries, supplies, contractors) for the claim year.This scrutiny ensures that the IRS does not have to spend excessive time and resources identifying which projects qualify, as the burden of proof is shifted completely to the taxpayer.II. Understanding the core statutory requirementsTo be eligible for the federal R&D tax credit, all research activities must satisfy the IRS Four-part Test. This scrutiny is the cornerstone of Section 41 and serves as the primary filter for determining whether an activity falls under the category of ‘qualified research’.1. Permitted purposeThe objective of the research project needs to be to create or improve a business component’s function, performance, reliability, or quality. It is crucial to distinguish between ‘permitted purpose’ and ‘commercial success’. The IRS does not ask for a research result to be a marketable product, only that the intent was to improve a functional aspect of the component. Notably, this does not apply to aesthetic or cosmetic changes.For example, if a company redesigns a smartphone purely to alter the colour or the curvature of the casing for visual appeal, those costs are non-qualified. However, if the curvature design is altered to improve heat dissipation, then it falls under the category of permitted purpose.2. Technology in natureThe activity must basically rely on principles of the physical sciences, biological sciences, engineering, or computer science. This requirement, often referred to as the ‘Hard Science’ test, excludes research projects in the fields of social sciences, economics, or humanities. Presently, the IRS specifically focuses on software development. To satisfy this criterion, the software project must include computer science principles such as algorithm design or database architecture, rather than mere routine coding or troubleshooting.3. Elimination of uncertaintyThe taxpayer must mandatorily demonstrate that, at the start of the R&D project, technical uncertainty existed regarding the capability or method of development, or the correct design of the product. The uncertainty explained here is not about whether a project will be profitable; it is about whether the research and engineering team knows how to achieve the objective while navigating through the uncertainties. Project documentation must reflect the ‘technical question’ that was defined at the start of the project.4. Process of experimentationThe development must include a systematic evaluation of alternatives through modelling, simulation, or trial-and-error testing. The IRS requires that substantially all of the activities constitute this process. A common mistake is documenting only the final successful version of a project. To defend the credit claim, the taxpayer must show the efforts involved, including the failed prototypes, the discarded models, and the iterative tests that led to the final outcome.III. Common pitfalls and the documentation gapDespite the clear statutory requirements, many organizations struggle to defend their R&D claims during an audit. This is rarely due to the research not happening; it is because evidence is reconstructed after the end of the research work.1. Insufficient linkageThe failure to connect technical uncertainty to the actual R&D costs, such as wages/salaries and supplies incurred for a specific project, is one of the main reasons for claims being rejected or the disallowance of tax credits. Even though the project was innovative, if the company cannot prove the exact resources and time spent on a specific R&D activity, the expenses may be excluded. Project-level accounting is no longer just an ideal method, but a requirement.2. Hindsight bias and the George v. Commissioner rulingThe Tax Court ruling in George v. Commissioner (2026) created a disruptive impact throughout the tax community by stressing that uncertainty must be documented at the start of the work. The court rejected the taxpayer’s attempt to invent uncertainty retroactively based on the fact that the project eventually failed. The ruling established that if the taxpayer did not record the technical challenges they expected to face in their contemporaneous project notes, they cannot use the eventual failure as proof of uncertainty.3. Manual dependencyRelying merely on spreadsheets or year-end interviews with R&D personnel often leads to missing and inaccurate data that cannot satisfy a rigorous audit. When R&D staff are asked about their work and tasks after several months, they tend to summarize. These summarizations often miss out the trial-and-error phase, which is exactly what the IRS needs to analyse the element of ‘process of experimentation’ in the research project.IV. How innoscripta and Clusterix support compliance objectivesinnoscripta’s Clusterix software is specifically designed to address the challenges of the 2026 regulatory environment. By digitizing the R&D workflow, it transforms the R&D credit from a risky retrospective claim into a strong, contemporaneous tax asset.1. Contemporaneous data captureClusterix captures technical narratives and project objectives in real time. By integrating with existing project management and payroll processes, it generates a digital trail that meets the IRS’s expectations for accurate records.The platform also enables real-time tracking and documentation that completely eliminates the hindsight bias identified in George v. Commissioner by timestamping the technical uncertainties.2. Automated Section G preparationThe Clusterix platform enables the granular-level mapping required for Form 6765, Section G. Clusterix tracks expenses at the task and component level, creating a streamlined documentation process.This user-friendly software ensures that each phase and expense of the research project, such as wages, supplies, and contractor costs, is precisely recorded and allocated against the respective business components. This eliminates the risk of calculation errors and reporting gaps that often trigger IRS audits.3. Defense of technical narrativesClusterix’s project documentation features ensure that all information about the project at multiple stages, including the technical narratives, is recorded accurately enough to satisfy the stakeholders of the project and also clearly enough to be understood by a tax auditor.This provides tax leaders with strong narratives that clearly elaborate the process of experimentation, providing a pre-built defence file for every project.4. Integration with Section 174A requirementsThe “One Big Beautiful Bill Act” (OBBBA) of 2025 introduced IRC Section 174A, which significantly changed the landscape for domestic research expenditures. Starting in tax years after 2024, Section 174A allows for the immediate expensing (full deduction) of domestic R&D costs, reversing the five-year amortization requirement previously in place.The capable project documentation features of the Clusterix platform manage the complex coordination process and help easily identify which costs qualify for the credit.5. A strategic financial opportunityFor companies considering the R&D tax credit as a strategic asset that supports long-term growth and competitiveness, innoscripta’s support would help them leverage the best of the federal financial opportunity to promote research and innovation.The impact innoscripta can create includes:Identification of apt opportunities: innoscripta’s expert innovation consulting supports companies in analysing and understanding potential funding opportunities to promote continued research and innovation.Strengthened financial reporting: By using Clusterix, tax leaders can provide auditors with transparent and accurate data and thus reduce uncertain tax position reserves on the balance sheet. As the quality of the documentation increases, so does the confidence in the credit’s sustainability.De-risking future audits: Establishing a consistent, technology-backed, systematic documentation methodology sends a strong positive signal during IRS scrutiny. When an organization can produce precise project documentation with timestamped logs and clear technical narratives within days of an Information Document Request (IDR), the likelihood of a protracted and expensive audit decreases significantly.ConclusionThe age of loosely documented R&D credit claims has ended, and defending claims in the 2026 landscape requires more than eligibility. It demands a structured, audit-ready process backed by specialized technology. The combination of mandatory Section G reporting, the five-item specificity rule, and recent Tax Court precedents means that any documentation gap is now a threat to successfully acquiring R&D tax credits.By aligning resources with the Clusterix platform, tax leaders can handle the complexities of Section 41 with utmost confidence. Transitioning to a contemporaneous, automated software platform like Clusterix secures the credit, and in 2026, the best defence is proactive, data-driven documentation.Note on extended deadlines for 2026: Fall tax filing deadlines vary by business structure. Calendar-year S Corporations and Partnerships face an extended filing deadline of September 15, while calendar-year C Corporations have until October 15.With these deadlines approaching, establishing contemporaneous Section 41 documentation well in advance is essential to support R&D tax credit claims and avoid last-minute compliance risks.
