Does Integrating AI Into a product Count as R&D?

For many startups, research and development is one of their largest expenses. In the early years, the focus is often on conserving cash, proving the technology and claiming as much eligible expenditure as possible for the R&D tax credit – after all, cash is king. As the business matures, the conversation changes. Investors want to understand what the company has created, whether the technology is commercially viable and what assets underpin its value. At that point, continuing to expense all development costs may no longer give a complete picture of the business, and, depending on the accounting standards applying to the business, may no longer be permitted. The transition from expensing R&D to recognising an intangible asset is therefore more than an accounting adjustment. It is often an important milestone in the startup journey. Research versus development Financial reporting standard NZ IAS 38 Intangible Assets outlines the accounting and tax rules, and distinguishes between the research phase and the development phase of a project. Research expenditure must be expensed as it is incurred. This generally includes early-stage investigation, evaluating alternatives and searching for new technical knowledge. At this stage, there is not enough certainty that the work will produce an asset capable of generating future economic benefits. Development occurs later, when research findings or other knowledge are applied to produce a new or substantially improved product, process, system or service before commercial production or use begins. A business applying NZ IAS 38 must capitalise development expenditure when it can demonstrate all six of the following: It is technically feasible to complete the asset so that it will be available for use or sale. The business intends to complete the asset and use or sell it. The business has the ability to use or sell the asset. The asset is expected to generate probable future economic benefits, including through an identifiable market or its usefulness within the business. Adequate technical, financial and other resources are available to complete the development and use or sell the asset. The expenditure attributable to the asset during development can be measured reliably. These requirements create a relatively high threshold. However, once all six criteria are met, capitalisation is not optional for a business applying NZ IAS 38. The business cannot continue expensing the expenditure simply because that produces a more favourable tax outcome. Capitalisation begins from the date the criteria are first satisfied. Costs incurred from that date are capitalised onto the balance sheet. Why startups often expense R&D in their early years At the beginning of the startup journey, there is usually considerable uncertainty. The business may still be working out whether the technology is feasible, whether customers will pay for it and whether sufficient funding will be available to complete the project. That uncertainty often means the NZ IAS 38 capitalisation requirements have not yet been met. The expenditure is therefore recognised as an expense. This treatment can also produce a valuable tax result. New Zealand’s tax rules generally allow an immediate deduction for qualifying research and development expenditure that is expensed for accounting purposes. That deductible expenditure may also qualify for the 15% R&D tax incentive and also the 28% R&D tax loss cash out, provided the activities and costs meet the requirements. For an early-stage startup, the ability to receive an R&D tax refund can be extremely important. Cash flow is king, and a tax credit received today may be more valuable than an accounting asset that produces deductions over a number of future years. However, the accounting treatment must still reflect the true stage of the project. A business cannot choose to continue expensing development expenditure solely to maximise its tax deductions or R&D tax credit. What changes once development expenditure is capitalised? To claim the R&D tax credit, the expenditure generally needs to be deductible for income tax purposes. Once development costs are capitalised as an asset, they are generally no longer immediately deductible. This means the business will usually be much more restricted in what it can claim for R&D tax credit purposes. There are some limited exceptions, but these depend on the nature of the asset and the expenditure involved. The key point is that capitalisation can significantly reduce the amount of expenditure qualifying for the R&D tax credit. Businesses should therefore consider the accounting, tax and R&D tax credit implications together when development expenditure begins to meet the requirements for capitalisation. However, the accounting treatment cannot be chosen simply to maximise the R&D tax credit. If the requirements for capitalisation are met, the expenditure must be treated accordingly. The next stage of the startup journey In its early stages, a startup’s financial statements may show accumulated losses and very few assets, even though the founders and development team have spent years creating potentially valuable technology. That is often the correct accounting outcome because the project has not yet reached the point where an intangible asset can be recognised. As the technology becomes feasible, funding is secured and a route to market is established, the position may change. Capitalising qualifying development expenditure puts an identifiable asset on the balance sheet and provides investors with greater visibility over the resources being committed to the product. It can also signal that the business has moved beyond open-ended experimentation. Management now has evidence that the product can be completed, the resources to complete it and a reasonable expectation that it will generate future benefits. Plan for the transition The point at which a project moves from early-stage research into capitalisable development is not always obvious. It should be considered each year as the product progresses, funding is secured and the path to commercialisation becomes clearer. If your business is developing something new, your accountant needs to understand what you are working on and where the project is in its development journey. The accounting, tax, R&D tax credit and wider commercial implications need to be considered together. If your accountant is not having this conversation with you each year, they may be missing an important issue. Equally, if they do not understand the R&D tax incentive rules, they may not appreciate how capitalising development expenditure could affect your claim. We can work alongside you and your accountant to: identify when a project may have reached the point where development costs need to be capitalised; explain the effect on your tax deductions and R&D tax credit claim; help establish a practical method for separating and recording different project costs; and consider how the treatment fits with your funding plans and the information investors expect to see. Getting advice early means the transition can be planned and properly documented, rather than discovered after year-end when the financial statements and R&D tax credit claim are already being prepared. Contact us for guidance. Disclaimer This article is intended for general information purposes only and does not constitute tax, legal or financial advice. The application of New Zealand's R&D tax incentive rules is highly fact specific, and the impact of the Budget 2026 changes will depend on individual circumstances. Professional advice should be obtained before taking any action or relying on the information contained in this article.

Discover the key Budget 2026 changes to New Zealand's R&D Tax Incentive, including in-year payments, software caps and filing flexibility.

Understand R&D in New Zealand. Learn about tax incentives & eligibility for businesses. Contact us for expert advice!

If your business is undertaking research and development activities and has a 31 March 2026 balance date, then 30 June 2026 is the final deadline to submit your General Approval (GA) application if you want to claim the R&D Tax Incentive (RDTI) for FY26. This deadline is fast approaching, and it is critical. Without a GA in place, no RDTI claim can be made for the year. Importantly, this deadline is not just for new applications. It also applies where existing approvals need to be updated or expanded to reflect changes in your R&D programme. What Is the R&D Tax Incentive The RDTI is a government initiative that offers a 15% tax credit on eligible R&D expenditure. Its purpose is to support innovation by helping New Zealand businesses offset the cost of developing new or improved products, processes, or technologies. The regime applies to a wide range of industries, including software development, engineering, manufacturing, agritech, life sciences, and more – provided the activities meet the legislative definition of eligible R&D (i.e. they seek to resolve scientific or technological uncertainty through a systematic process). Key features include: 15% tax credit on eligible R&D expenditure Refundable credit for businesses in loss (subject to caps and criteria) Applies to R&D conducted in New Zealand Why You Need a General Approval To claim the RDTI, you must have a General Approval (GA) in place. This application outlines your core and supporting R&D activities and is reviewed and approved by Inland Revenue in advance of making your claim. The GA application requires you to clearly set out: The technical uncertainty being addressed Why the solution was not readily deducible by a competent professional The experimental process undertaken to resolve that uncertainty Having this in place before or during the income year gives your business certainty. You can proceed with your investment in innovation knowing the activities will qualify for the tax credit. If you have not yet submitted a GA application for the 2026 income year, you still have time, but the 30 June 2026 deadline is final for businesses with a 31 March balance date. If approved, the General Approval can apply for up to three years, allowing you to streamline future claims (but only to the extent your activities remain consistent with what was approved). General Approval application deadline for 31 March 2026 year-end: 30 June 2026 Note: If you have a non-standard balance date, your GA deadline may differ. Please contact us to confirm your specific due date. Where Experienced Claimants Still Get Caught Out Even for businesses with prior RDTI experience, we see a number of recurring issues: Scope drift from prior approvals: Projects evolve, but approvals often are not revisited. What was approved in an earlier year may not cover the current iteration of the work. Incomplete coverage of activities: Not all qualifying activities are captured within the GA, resulting in parts of the R&D programme falling outside the approved scope. Blurring of R&D and commercial activity: As projects move toward commercialisation, it becomes critical to clearly isolate the R&D. Framing the uncertainty incorrectly: Even where genuine R&D is occurring, applications can default to describing product outcomes or business challenges rather than technical uncertainty that is not readily deducible. Government grants: This area is currently a minefield with Inland Revenue. The interaction between grants and the RDTI can materially impact eligibility and claim values, and should be addressed upfront. Overseas activities not treated correctly: Activities performed offshore are often not recorded or assessed correctly against the RDTI rules, creating risk around eligibility and supportability of the claim. We work in this space every day. Whether it is identifying gaps in existing approvals, refining uncertainty narratives, dealing with grant interactions, or ensuring offshore activity is treated correctly, we help clients navigate these issues before they become problems. Changes to Existing Approvals: Do Not Assume You Are Covered A common misconception is that once a multi-year GA is in place, nothing further is required. In practice, many businesses need to update or supplement their approval each year. If your R&D activities in FY26 have: shifted in scope or direction, moved from feasibility into scale-up or deployment, incorporated new technologies or methodologies, or introduced new areas of uncertainty, then your existing GA may no longer fully cover the work being undertaken. In those cases, an updated or additional GA submission is required, and must also be filed by 30 June 2026. We recommend reviewing your existing General Approval before 30 June to confirm it still reflects your FY26 R&D activities, and whether any updates or a new application is required. We can assist with that review and ensure any required changes are identified and filed on time. How We Can Help We are a specialist R&D tax team with deep experience in New Zealand’s RDTI regime. We work with clients across software, engineering, biotech, and advanced manufacturing, and regularly support claims involving complex technical and eligibility issues. Our clients choose us for our: Technical depth and understanding of IRD’s eligibility criteria Ethical, fixed-fee pricing model – no % of your claim Flexible, low-touch process, so you can stay focused on growing your business Whether you need end-to-end support or just help with the General Approval, we can tailor our involvement to suit your needs. We will handle the complexity, engage with your team as required, and ensure your application is accurate, compliant, and optimised for success. If you think your business may qualify for the RDTI but have not yet submitted your General Approval, contact us today. We will help you assess eligibility, prepare your application, and unlock the full benefit of the incentive. Disclaimer: The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.

The Deadline is Approaching for FY25 General Approval Applications

If your business is carrying out research and development (R&D) work, you may be eligible to receive a cash payment from Inland Revenue— however there is limited time to act if you want to claim this for FY24.