Cloud computing and the credit for increasing research activities.

AuthorColeman, Ryan R.

Cloud computing has created significant changes in information technology and continues to influence various industries and sectors including in the fields of education and government, and for technology companies themselves. Significant investment has been made at the national level. The United States has created a federal cloud strategy with the objective of reducing operational costs via economies of scale across multiple federal agencies. The goal, as laid out by the federal government, is to reduce annual federal information technology (IT) spending from $80 billion to $20 billion (see Kundra, Federal Cloud Computing Strategy (CreateSpace Independent Publishing Platform 2011)).

This item's focus is on the tax implications for users, providers, and developers of the cloud outside the realm of the government: specifically, how a taxpayer's rental expenses for cloud computing for purposes of research and development (R&D) of new products and solutions should be treated under the Sec. 41 research tax credit (RTC).

What Is the Cloud?

The "cloud" is a method of outsourcing IT functionality to a virtual environment that allows increased flexibility and scalability in response to supply and demand. The opportunities are endless, and the cloud can significantly shorten the software development life cycle by delivering products efficiently to customers on a global scale.

Cloud service providers (CSPs) are facilitating this revolution. CSPs offer a multitenancy model, thereby creating a Secure setting with performance metrics of equal caliber to traditional hosting or dedicated on-premise solutions. There is an increasing trend of software development companies leasing space from the CSPs. This practice creates efficiencies for software development companies by allowing the leasing of storage space necessary for development and testing. Without such an option, the expenses related to on-site hosting of the equipment essential to developing applications is often insurmountable or cost-prohibitive to many taxpayers. In this model, the software developer can test a solution in a live setting, which offers the ability to assess the feasibility and scalability of a solution in a more cost-effective manner.

The growth of the cloud is accelerating. With such rapid development comes significant uncertainty in many facets of the model. For example, the typical ideas of ownership, licensing, purchasing, and administrative issues have been fundamentally...

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