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Last reviewed: October 23, 2026
What you pay an MVP development company is deductible in full in 2026 if the people building your product work in the United States: IRC §174A treats software development as a domestic research expense. If they work abroad, §174 spreads the same invoice over 15 years starting mid-year, so a $60,000 build gives you $2,000 of deductions in 2026 instead of $60,000. The test is where the work is done, not where the studio is registered, which makes choosing a studio a tax decision as well as a product one.
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Yes. Section 174A(d)(3) says "any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure," and §174(c)(3) says the same for work done abroad. A studio writing the code instead of your own employee does not change that: Treas. Reg. §1.174-2(a)(10) applies the research rules to work "carried on in his behalf by another person or organization (such as a research institute, foundation, engineering company, or similar contractor)."
What counts as software development comes from Notice 2023-63, the IRS's interim guidance. Its section 5.03 lists planning the software and documenting its requirements, designing it, building a model, writing source code, and testing and fixing defects until the product is ready for sale or placed in service. A studio's requirements work, UI design, sprints and pre-launch QA all fit. Section 5.05 excludes training, marketing, customer support and maintenance that adds no functionality once the software is ready, and section 5.04 excludes buying and configuring existing software.
The guidance is still thin. There are no regulations under §174A yet; Notice 2023-63 was written for the 2022 to 2024 version of §174, and Rev. Proc. 2026-32 lets taxpayers change their accounting method to rely on its sections 3 to 7 for foreign research costs. Regulations under §§174 and 174A are item 19 on the Treasury and IRS 2026–2027 Priority Guidance Plan, released September 29, 2026.
Two code sections now split research costs by geography. Section 174A allows "domestic research or experimental expenditures" as a deduction in the year they are paid or incurred, for tax years beginning after December 31, 2024. Section 174 covers foreign research, which §41(d)(4)(F) defines as research "conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States," and requires amortization "ratably over the 15-year period beginning with the midpoint of the taxable year." For a calendar-year business the midpoint is July 1 (Notice 2023-63, section 3.05), so year one gets half a year's share: 1/30 of the cost.
Owen, an illustrative founder in Denver, is building a booking app for physical-therapy clinics through his single-member LLC, which files on Schedule C. He pays a studio $60,000 between February and June 2026 and opens the app to paying clinics in July. His household's taxable income stays in the 24% bracket with or without the deduction. Here is the same $60,000 under each section:
| Year | Studio's people work in the US (§174A) | Studio's people work abroad (§174) |
|---|---|---|
| 2026 | $60,000 | $2,000 |
| 2027 to 2040 | $0 | $4,000 a year |
| 2041 | $0 | $2,000 |
| Federal income tax saved in 2026 at 24% | $14,400 | $480 |
Both columns reach $60,000 eventually. The difference is timing, and in Owen's launch year it is worth $13,920 of cash. Paying before the first sale does not by itself block the deduction; the SaaS taxes guide for bootstrapped LLCs covers the pre-launch rule from Snow v. Commissioner and its conditions. Mixed teams split the bill. If a quarter of the hours came from a product lead and a designer in the US and the rest from engineers abroad, Owen would deduct $15,000 plus one-thirtieth of $45,000, or $16,500, in 2026.
Tax rarely flips the price comparison on its own. Suppose a US studio quotes $90,000 and a studio abroad quotes $60,000. At 24%, the US build costs $68,400 after its 2026 deduction and the foreign build $59,520 after its $480 saving. The first-year gap shrinks from $30,000 to $8,880, but the foreign quote stays cheaper, and its remaining $58,000 of deductions arrives through 2041.
One asymmetry hurts founders whose MVP fails. Section 174(d) says that if the product is "disposed, retired, or abandoned" during the amortization period, no deduction is allowed on that account and the amortization "shall continue." A US-built MVP shut down in 2027 was already deducted in 2026; a foreign-built one keeps coming out at $4,000 a year on the original schedule.
The full deduction is not mandatory. If you would rather spread a US build, for example because you have no income in 2026 to absorb it, §174A(c) lets you amortize it over 60 months or more, starting with the month you first realize benefits. You elect by attaching a statement to a timely filed original return, as described in section 6.02 of Rev. Proc. 2025-28.
Interactive
2026 deduction for an MVP built in the US or abroad
Enter the studio's price and how much of the work its people do outside the US. Domestic work is deducted in full under §174A; foreign work follows §174's 15-year schedule.
Discovery, design, coding and pre-launch testing invoiced by the studio.
2026 deduction
$2,000
Worth about $480 of federal income tax in 2026 at 24%.
IRC §174A for development performed in the US (you may instead elect to amortize over 60+ months); IRC §174 for development performed outside the US, 15 years from the midpoint of the tax year. Assumes a calendar tax year, payment in 2026, a business able to use the deduction, and a flat marginal rate. Does not include start-up costs under §195 or the research credit.
Notice 2023-63, section 3.04, tells taxpayers to "look to where the SRE activities ... are performed." The studio's state of incorporation and billing address do not decide the question. A US company whose engineers work in Brazil or Poland produces foreign research for those hours, even though the invoice comes from a US entity. The same test applies to freelancers hired through a marketplace.
Before signing, ask where every person who will bill hours on your project works and whether any work is subcontracted. Building Jupid, my advice to founders is to get invoices that split hours by country from the very first one, because reconstructing the split later means asking a studio to dig through a year of timesheets.
The forms you collect follow the studio's legal status; the deduction follows where the work is done. A US company with an offshore team gives you a W-9 and may get a 1099-NEC, and its offshore hours still fall under §174.
| US studio | Foreign studio | |
|---|---|---|
| Form you collect before paying | Form W-9 | Form W-8BEN-E (a company) or W-8BEN (an individual freelancer) |
| Form 1099-NEC for 2026 payments | Yes at $2,000 or more, unless the studio is taxed as a C or S corporation; due February 1, 2027 | No |
| US tax withheld | None, unless the studio fails to give a correct taxpayer ID (24% backup withholding) | None for work performed outside the US |
| Deduction | §174A for work done in the US, §174 for any part done abroad | §174 for work done abroad |
For payments made in 2026, the Instructions for Forms 1099-MISC and 1099-NEC raise the reporting threshold to $2,000; the 1099 threshold guide covers the change. Payments to a corporation, "including a limited liability company (LLC) that is treated as a C or S corporation," are generally exempt, so the tax classification box on the studio's W-9 tells you whether to file; the rules for each kind of LLC are in our guide to whether LLCs get a 1099.
Publication 515 states that "the place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer." Work performed abroad is foreign-source income, so there is no 30% withholding and no Form 1042-S. The Instructions for Form W-8BEN-E say to provide the form "before income is paid or credited," so collect it before the first deposit. Because Publication 515 treats fees paid before the services are performed as US-source when the source "cannot be determined at the time of payment," the contract should also say where the work will be done. The W-8BEN vs W-9 guide walks through both forms.
Section 195 start-up costs and §174A development are separate buckets: §195(c)(1) keeps anything deductible under §174 or §174A out of start-up costs. Start-up costs give you up to $5,000 in the year the business begins, reduced once they pass $50,000, and the rest over 180 months; development done in the US is deductible in full. The SaaS taxes guide linked above has a tool that splits pre-launch spending between the two, and the startup cost calculator helps plan the whole budget.
Discovery is where invoices blur. Notice 2023-63 counts "planning the development of the computer software," including "identification and documentation of the software requirements," as development. Customer interviews and market research are investigating whether to start the business, which makes them start-up costs when paid before launch. A discovery week often mixes both, so ask the studio to bill them as separate lines.
Marketing websites are a gray zone. Notice 2023-63 has no example for them. Keep copy, content and SEO on their own invoice lines, because that is marketing, and ask your preparer how to treat custom-coded site features.
Many studios stay on after launch, and Notice 2023-63 splits that work in two. Once the software is ready for sale or in use, maintenance that adds no functionality and customer support are not software development, so those invoices are generally ordinary business expenses, deductible when paid wherever the studio's people sit. Upgrades and enhancements, which the notice defines as changes that add functionality or "materially increase speed or efficiency," are development again: §174A in the US, 15 years under §174 abroad.
With a team abroad, the split decides your deduction. A $3,000 monthly retainer that is half bug fixes and half new features gives you $1,500 deductible now and $1,500 on the 15-year schedule, but only if the invoice shows the split.
Owning the code is a legal question first. Under the Copyright Act, a commissioned work is a "work made for hire" only if it falls into one of nine categories, such as a translation, a compilation or an atlas, and both parties sign an agreement saying so (Copyright Office Circular 30). Software is not on the list, so a work-for-hire sentence alone can leave the copyright with the studio. What moves it to you is an assignment: 17 U.S.C. §204(a) requires a transfer of copyright to be "in writing and signed by the owner of the rights conveyed." Our independent contractor agreement template uses both clauses.
Three terms deserve a line in an MVP contract:
Each entry reflects what the studio's own website said on October 21, 2026 about where its people work, its prices and its process. Where a site does not say where the engineers sit, the table says so; ask before you sign, because the answer decides between §174A and §174.
| Studio | Where the site says the team works | Published price | Section for the build |
|---|---|---|---|
| Atomic Object | US only (four US regions) | $50k to over $1 million | §174A |
| Upcode Studios | US-based team | $100/hr; fixed-scope MVPs from $25k | §174A |
| thoughtbot | Americas, Europe, West Asia, Africa | Weekly rate per person, not published | Depends on your team |
| Chop Dawg | United States, Brazil, Pakistan | MVP from $7.5k a month, 1 to 4 months | Split by hours |
| Upsilon | US headquarters, teams in 8 countries | Discovery $6,000; most MVPs $20k to $65k | Split by hours |
| Altar.io | Portugal | Past MVPs €18k to €100k | §174 |
| Codica | Ukraine | Average MVP $30k to $70k | §174 |
| Invental | Not stated (remote-first, Montevideo footer) | Not published | Ask the studio |
Atomic Object is an employee-owned software consultancy, founded in 2001, with offices in Ann Arbor, Chicago, Grand Rapids and Raleigh-Durham. Its site says "Atomic only hires in our four U.S. regions, and we don't offshore your project team." Projects "usually run 3-18+ months, with a budget of $50k to over $1 million." Work moves from pre-project consulting through design and development, with "progress every two weeks," to optional ongoing support. Clients "fully own the rights, including the source code," once the project is complete.
Limit: the $50,000 floor rules out a small first version, and the site says Atomic is "not a good fit to create a marketing site."
Tax note: with US-only staff, the whole build qualifies for §174A.
Upcode Studios advertises a "senior US-based team at $100/hr" and "fixed-scope MVPs from $25k, shipped in 3–4 months." A 30-minute scoping call leads to a proposal "in 48 hours" with a fixed price or an hourly estimate, then a tappable prototype and two-week sprints. A monthly retainer for releases, crash triage and new features after launch starts "from $750/mo." The site says backend work is built in-house rather than subcontracted, and that the repo, the store accounts and every line of code are yours from day one.
Limit: Upcode is a generalist agency that also sells digital marketing and Wix development, so MVP work is one service among many.
Tax note: a US-based team points to §174A; ask the contract to confirm that no work is subcontracted abroad.
thoughtbot is a design and development agency working since 2003; its MVP service starts with discovery sprints that take "as little as 2 weeks." Its public playbook says it prices "at a per person, per week rate," consults four days a week, requires payment for the first two weeks to start, and agrees that the client "owns the week's source code once they've paid their weekly invoice." Its careers page says teammates are "located throughout the Americas, Europe, West Asia, and Africa" and work with clients "in similar timezones."
Limit: the rate is not published, and thoughtbot says it does not do "fixed-bid, fixed-feature-set proposals," so the budget moves with scope.
Tax note: the site does not say where a given client's team sits, and the Americas include Canada and Latin America, so ask for each person's location at kickoff.
Chop Dawg has built iOS, Android and web apps for startups and other clients since 2009. Its FAQ says clients are "supported by a full-time global team based in the United States, Brazil, and Pakistan," all employed directly rather than through third-party contractors. The pricing page lists "MVP You Can Ship," a mobile or web MVP focused on core use cases, at "1-4 Months" and "Starts at $7.5K/mo."
Limit: monthly pricing means the total depends on how many months the build runs.
Tax note: a three-country team usually means a split, with §174A for US hours and §174 for the rest, so ask for invoices by country.
Upsilon lists offices in Sheridan, Wyoming, and Tallinn, Estonia, says it is "headquartered in the USA," and describes "distributed teams" that "span 8 countries across 3 continents." It publishes prices: a two-week Project Discovery Team for $6,000, an MVP Development Team for builds under three months "from $20,000," and "the price range for most MVPs is $20,000 - $65,000." It offers a money-back guarantee if you are unhappy with the team in the first two weeks, and says clients keep ownership of the source code "from day one."
Limit: Upsilon works only in Python and JavaScript.
Tax note: a US headquarters does not make the work domestic; whatever share the teams abroad build goes under §174.
Altar.io is a product and custom software development company headquartered in Lisbon whose site says "WE'RE ALL BASED IN PORTUGAL," engineers included. Instead of a rate card it publishes past MVP prices: an arts marketplace in 2 months for €18k, a community platform in 3 months for €40k and a legaltech tool in 2 months for €100k. Its Seed program starts a project "with ~50% of the code already done," and the team builds the custom core and interfaces on top.
Limit: prices are in euros, and the site does not say who owns the prebuilt Seed code.
Tax note: an all-Portugal team means §174 for the whole build; ask whether the prebuilt half is assigned or licensed to you.
Codica lists an office in Tallinn, Estonia, and its FAQ says "our development team is entirely from Ukraine," working remotely, with most of the team in Ukrainian cities and some in other European cities. Its MVP page puts "the average cost of the MVP" at "about $30,000-$70,000" and describes weekly sprints with daily standups.
Limit: working hours are 08:00 to 20:00 Ukraine time, so US founders share only their mornings with the team.
Tax note: a Ukraine-based team means §174 and the 15-year schedule for the full build.
Invental is a full-stack development studio founded in 2014 that builds websites, web applications, mobile apps and Shopify extensions (custom apps, checkout UI extensions and theme development), and also does web design, SEO and custom templates. It moves products from no-code builders such as Bubble, Webflow and Wix into real code, and its senior reviewers check AI-built apps for code quality and security. The process has four phases: Discovery, "a focused week of calls, audits, and sketches"; Design; Build in two-week sprints with staging from day one; and Ship and support, with the studio staying on retainer for the first quarter after launch.
Limit: no published prices; the site mentions dedicated rates for venture builders and says Invental takes "a limited number of engagements at a time."
Tax note: the footer says Montevideo, Uruguay, and the site describes a "remote-first team of talented people around the world" without saying where a given project's engineers work. Ask before you sign: work performed outside the US falls under §174's 15-year amortization, as it does with every studio abroad.
Deducting a foreign build in full. In Owen's case that claims $60,000 in 2026 when §174 allows $2,000, and the IRS can push the rest back across 15 years.
Trusting the studio's address. A US headquarters with engineers abroad still produces foreign research for the hours worked abroad.
Filing development as start-up costs. §195(c)(1) excludes amounts deductible under §174 or §174A, so a US build lumped into start-up costs loses most of its first-year deduction.
Sending 1099-NECs to the wrong studios. A foreign studio with a W-8BEN-E gets none, a studio taxed as a corporation gets none, and a US LLC taxed as a partnership or owned by one individual gets one at $2,000.
Writing off an abandoned foreign build. Under §174(d), shutting the product down does not release the unamortized balance; it keeps coming out on the 15-year schedule.
An MVP build leaves invoices that do not belong in one bucket: development under §174A or §174, market research under §195, post-launch bug fixes as ordinary expenses, and software subscriptions on top. Jupid connects to your business bank account, categorizes each payment with 95.9% accuracy, and answers questions about your numbers in WhatsApp or iMessage. It carries the result into quarterly tax estimates with due date alerts and a federal and state return reviewed by a CPA, built for freelancers, self-employed founders and LLC owners. Try Jupid.
This guide is for general educational purposes and does not constitute tax, legal, or accounting advice. Studio prices and team locations come from each studio's website and change often; confirm them in writing before you sign. IRS guidance on §174A is still interim, and the contract terms on code ownership are a legal question; for advice specific to your situation, consult a qualified tax professional and a lawyer.
CEO & Co-Founder
Fintech CEO with 10+ years building accounting and financial technology products. Previously co-founded and scaled an AI-powered accounting platform to $30M revenue and 100K+ business users, achieving 30,000 customers per accountant through automation — recognized by CNBC as a top fintech company. Holds a Master's in Management Information Systems. At Jupid, he leads the development of AI-native bookkeeping, tax, and compliance tools designed for freelancers and small business owners.
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