- Yes, often. Software development can qualify for R&D tax relief in the US and UK, either as a deduction, a credit, or both.
- Location changes the math. In the US, domestic software costs can be deducted immediately, while foreign development is still spread over 15 years. UK relief also restricts overseas work.
- Ask before you sign. Where your studio does the work is a tax question as much as a price question. Get your accountant's view before you choose.
R&D tax relief is a government incentive that reduces your tax bill (or, for some young companies, your payroll tax) when you spend money on qualifying research and development. Software development can count. Where your dev studio is located can change what the build really costs you, because both the US and the UK treat domestic and overseas work differently. This article explains how, in plain terms. It is not tax advice, and your accountant has the final word.
Two different things: a deduction and a credit
Founders often mix these up, so separate them first.
A deduction lowers the income you pay tax on. A credit lowers the tax itself. In the US, software development touches both: Section 174 governs how you deduct research costs, and the R&D credit is a separate benefit.
Most of the confusion comes from Section 174, which changed in 2022 and again in 2025. The history explains why location matters now.
What changed in the US, and why it matters for a build
Before 2022, companies could deduct research and experimental (R&E) costs immediately or amortize them over at least 60 months. From 2022, the law required five-year amortization for domestic research and 15 years for foreign research. For software startups, that meant paying for a build in one year and deducting it over several.
Then the One Big Beautiful Bill Act, signed July 4, 2025, created Section 174A. It allows an immediate deduction for domestic R&E expenditures, including software development costs, paid or incurred in tax years beginning after December 31, 2024.
The key word is domestic. Foreign research activities continue to be subject to the Section 174 capitalization and amortization requirements, so foreign R&E must be capitalized and amortized ratably over 15 years.
Kaufman Rossin puts it plainly: domestic software development costs are deductible, but foreign software development costs are still capitalized and amortized over 15 years. It adds that companies using developers outside the US may want to re-evaluate their strategy.
Other options and catch-up rules
You do not have to take the immediate deduction. Taxpayers can still elect to capitalize and amortize domestic R&E over 60 or 120 months instead.
There is also a catch-up window. "Small taxpayers" (average gross receipts of $31 million or less) may retroactively deduct domestic R&D for 2022 through 2024 by amending prior-year returns. All taxpayers can deduct unamortized Section 174 costs fully in 2025 or spread them over 2025 and 2026. If you built software in those years, ask your accountant whether this applies to you.
The US R&D credit for software
The credit is separate from the deduction. According to Strike Tax, qualified research expenses include W-2 wages for R&D staff, supplies, 65% of contract research payments to third parties, and cloud computing costs tied to development. The same source says the credit typically equals 6% to 10% of qualifying research expenses.
Two points matter if you hire an outside studio:
- Only part of what you pay a third party counts. Generally 65% of contract research costs qualify, and the research must be conducted in the U.S.
- Because the research must be conducted in the US, work done by a studio abroad does not fit that test.
So for a US company, a domestic build can qualify for an immediate deduction and for part of the credit. An overseas build is amortized over 15 years, and the credit requires US-based research.
The payroll tax route for very young startups
If your startup has no income tax to offset, a credit alone does little. The payroll election exists for that case. The Inflation Reduction Act raised the qualified small business payroll tax credit election from $250,000 to $500,000 for tax years beginning after December 31, 2022.
The eligibility test is narrow. A qualified small business must have gross receipts of less than $5 million for the tax year. Per BDO's reading of the rule, it must also have no gross receipts in the four preceding tax years.
According to the IRS instructions for Form 941, the credit first reduces the employer share of social security tax for the quarter, and any remainder reduces the employer share of Medicare tax. Because it offsets employer payroll tax, you need payroll for it to work. Talk to your accountant about this early.
How the UK treats it
The UK works differently, and the overseas restrictions are explicit. Under the merged scheme, the credit pays 20%. It is a taxable expenditure credit, and there are restrictions on claiming for some expenditure incurred overseas.
Because the credit is taxable, the real benefit is smaller than 20%. The effective relief rate is 15% for most companies paying corporation tax at 25%, and 16.2% for companies on the 19% small companies rate.
On location, there are two rules to know:
- HMRC guidance says UK R&D relief is not available if cost or staff availability, alone or combined, is the main reason for doing the R&D overseas.
- Under the merged scheme, expenditure on externally provided workers and subcontractors is restricted to UK-based activities.
The second rule matters if you hire an outside studio. If the studio does the work abroad, that spend may not count toward your claim.
Side by side: how location changes the picture
| Question | US company | UK company |
|---|---|---|
| Software build done domestically | Immediate deduction under Section 174A for tax years beginning after Dec 31, 2024; credit possible | Eligible for the merged scheme credit of 20% (15% effective for most companies, 16.2% at the 19% rate) |
| Software build done overseas | Still capitalized and amortized over 15 years; credit requires research conducted in the US | Restricted: subcontractor and external worker spend limited to UK-based activities |
| Outside studio spend | Generally 65% of contract research costs qualify for the credit, if done in the US | Externally provided workers and subcontractors count only for UK-based activities |
What this means for your build budget
A quote is only half the cost. The other half is what you get back, and that can vary by studio location.
Take two builds with the same sticker price. If one is done in your home country and one overseas, the domestic one may qualify for faster deductions, a credit, or both, while the overseas one may qualify for less. The cheaper quote may not be the cheaper project once tax treatment is included.
I would not turn this into a rule that you must always build at home. Plenty of founders have good reasons to work with a studio elsewhere: skills, timing, product fit. But treat tax treatment as a real line in the budget, not an afterthought. Three practical steps:
- Ask where the work will be done. Not where the company is registered, but where the people writing the code sit. For mixed teams, ask for the split, since mixed teams require allocation.
- Get the contract to say it. A contract that describes the work, who did it and where gives your accountant something to work from. Our project planner can help you break a build into phases.
- Talk to your accountant before kickoff. Not after the invoices are paid. Decisions about studio and structure are hardest to change once the work has started.
Where Authect fits
We are not tax advisers and we do not give tax advice. You can see how we scope work on our pricing page, and what we build across software development and AI development.
If you are weighing studios, ask each one where the work is done and who does it, ours included. That question affects your tax position, so it deserves a straight answer. You can reach us through the contact page if you want to talk through a scope before you speak to your accountant.
FAQ
Can a pre-revenue startup claim R&D tax relief on software?
It may be able to, but the route differs. In the US, a startup with no income tax to offset may use the payroll tax election if it is a qualified small business. That requires gross receipts under $5 million for the tax year and, per BDO's reading, no gross receipts in the four preceding tax years. The credit offsets payroll tax, so you need payroll for it to work.
Does hiring an overseas studio kill my R&D claim?
Not necessarily, but it limits it. In the US, foreign software development is still capitalized and amortized over 15 years, and the credit requires research conducted in the US. In the UK, relief is restricted for overseas work, and externally provided workers and subcontractors are limited to UK-based activities. Check your specific case with an accountant.
How much of an outside studio's invoice counts toward the US credit?
Generally 65% of contract research costs qualify, provided the research is conducted in the US. The credit itself typically equals 6% to 10% of qualifying research expenses. Only your accountant can tell you what applies to your project.
Is the UK 20% credit really worth 20%?
No. The credit is taxable, so the effective relief rate is 15% for most companies paying corporation tax at 25%, and 16.2% for companies on the 19% small companies rate.
