Research allowance for software development: When your IT or AI project is eligible

Many companies that develop their own software or AI solutions leave money: The tax research allowance supports research and development with up to 35 percent of personnel costs – regardless of company size, industry or profit situation. Nevertheless, they use comparatively few medium-sized software projects, usually for one of two reasons: You do not consider your own project to be "research", or you shy away from the effort. This article shows when software development is eligible, how the application works and what you should pay attention to.

Note: This post provides a technical overview and does not replace tax advice. For the binding examination of your project, contact your tax consultancy or directly the Certificate Office Research Allowance (BSFZ).

The research allowance shortly

• Who: all taxable companies in Germany, from start-ups to corporations – even those who write losses.
• How much: 25 percent of eligible expenses, for small and medium-sized enterprises 35 percent. Since 2026, the tax base has not exceeded EUR 12 million per year; In addition, there is a flat rate of 20 percent for overhead costs.
• What: above all personnel costs for own R&D employees and – 70 percent – fees for commissioned research and development (contract research).
• How to pay: The allowance shall be charged against the tax. If it is higher than the tax liability, the rest is paid out.

The biggest difference to other funding programs

For almost all grants, the following applies: first application, then project start. The research allowance is different. They may apply for them for operations which are already ongoing or completed and for marketing years which have already expired. There are no deadlines, no budgets to compete for, and no competition with other applicants. Anyone who meets the requirements has a claim.

When is software development “research and development”?

This is the real hurdle. The BSFZ examines projects on the basis of the internationally customary criteria of the so-called Frascati Handbook of the OECD. A project shall thereafter be considered as R & D if:

1. novel is – i.e. aimed at new insights, not just a new product for your own company,
2. created is based on original concepts and hypotheses,
3. uncertain as a result – at the beginning it is not clear whether and how the goal is technically achievable,
4. systematic planned and budgeted,
5. transferable or reproducible is – the results can be traced and used further.

For software, the criterion is technical uncertainty usually crucial. The question is not “Is the product new to us?” but “Was there a technical problem at the beginning of the project for which no known solution existed?”

Typically no eligible

• a web or business application with established frameworks and well-known patterns,
• the adaptation or introduction of standard software,
• the connection of an AI service via a documented interface, without its own technical problem,
• Troubleshooting, maintenance and routine development,
• Migration to a new version or platform with known tools.

Frequently eligible

• the development of new algorithms or methods, such as optimisation, pattern recognition or data processing, where existing approaches are insufficient,
• AI models for tasks for which there is no proven solution – for example the evaluation of unusual sensor data or the reliable extraction from highly inconsistent documents,
• Systems that have to meet novel requirements for real-time capability, scaling or resource consumption without it being clear whether this succeeds,
• Methods for the automated analysis and transfer of data of unknown or undocumented structure, for example in difficult situations Data migrations,
• hardware-related software with unresolved technical issues, for example in automotive or mechanical engineering.

Often not the whole project is eligible, but a clearly definable part. It is worth structuring the project accordingly: The R&D core – such as the development and testing of a new process – is described and documented separately, the subsequent implementation into an application runs as a normal project.

Own development or contract research?

It is not only what your own employees develop. If you commission an external partner based in the EU or the EEA with research and development work, 70 percent of the fee paid will be included in the tax base. The research allowance is requested by the client, not the service provider. This makes the allowance also interesting for companies that do not have a development department themselves.

The prerequisite here is also that the commissioned work meets the R & D criteria. A classic development contract for a standard application is not eligible for funding because an external partner implements it.

This is how the application expires

1. Apply for a certificate from the BSFZ. They describe the project online: goal, state of the art, technical uncertainties, procedure and work plan. The BSFZ only checks whether it is R & D – not the costs. The application shall be free of charge.
2. Apply for research allowance at the tax office. With the certificate you apply for the ELSTER allowance at the end of the marketing year and provide proof of the eligible expenditure.
3. Settlement or payment. The allowance shall be charged at the next tax assessment.

What is important in documentation

Most applications fail not because of the technique, but because of the description. A good application explains understandably, which technical problem is to be solved, why Known Solutions Are Not Enough and how systematic approach. Terms such as “innovative” or “AI-supported” help little – but concrete technical questions help a lot.

To prove the costs, you also need a project-related time recording of the participating employees. Those who manage this cleanly from the beginning save a lot of work later. Good practice from software development – tickets, version management, documented experiments and test results – provides the most evidence anyway.

Conclusion

The research allowance is not a program only for large companies with research department. Anyone who develops software or AI and solves real technical problems should check whether the project – or part of it – is eligible. The fact that the allowance can also be applied for retroactively makes it easy to get started: A look at the projects of recent years is often worthwhile.

An overview of further funding paths for digitalization and AI can be found in our article on Funding for IT and AI projects 2026. If you plan a development project and want to set it up from the beginning so that R&D shares are clearly delineated and documented, we support you in the individual software development – also as a partner for commissioned research and development.