Breaking Down the Basics of R&D Tax Credit Documentation

5 Minute Read
Posted by Brad Mols on Jun 25, 2020 7:48:11 AM

The research and development tax credit provides competitive incentives and extensive cash flow opportunities for U.S. business owners. However, as with many government programs, receiving the benefit often relies heavily on one major component: the paperwork.


R&D Tax Credit Documentation Plays a Vital Role in Compliance and Program Benefits

Proper R&D tax credit documentation requires proof of all Qualified Research Expenditures (QREs) and other expenses to both maintain program compliance and maximize the total possible tax return. Most importantly, consistent and thorough documentation can also help minimize corporate risk should an organization find itself undergoing an IRS audit. 

Documentation, tracking, compliance, audit—for many business owners, even the thought of these words is enough to deter them from pursuing research and development tax credits. As a result, each year, organizations of every size and scope miss out on this highly rewarding program simply because they don’t want to deal with the paperwork.


Check out Acena Consulting's R&D Tax Credit Documentation Checklist

At Acena Consulting, we understand that no one (besides our team, of course), enjoys chasing tax paperwork. We offer an easy-to-follow Research and Development Tax Credit Checklist to keep our clients focused on the documentation essentials to make filing for the R&D tax credit as seamless as possible. Some key considerations include:

Understanding the Required Document Framework

One of the first steps in launching an R&D tax credit tracking system is to recognize the basic documentation framework associated with your business’ eligibility. It’s important to know that you’ll need computation work papers completed for the year the R&D tax credit is filed. Additionally, you’ll need to include a completed Form 6765 and attach it to your return.

Mechanical Computation Review
A thorough mechanical computation review plays an integral role in the documentation process. For companies using a Section 280C(c) election, the calculation has been recently updated to provide a more significant benefit to business owners. 

Qualified Research Expenditures (QREs)
Many executives don’t realize that total qualified research expenditures consist of both contracted and internally incurred costs. Some of the most significant and most common qualified research expenditures requiring compliant documentation proof include:

  • Salaries/wages of staff and supervisors working on eligible initiatives 
  • Non-depreciable supplies, equipment, and materials used for R&D initiatives
  • Payment to contractors performing qualifying tasks

To determine if an operation qualifies as an eligible activity, it must pass a four-part test, demonstrating:

  • Elimination of Uncertainty
  • Process of Experimentation
  • Technological in Nature
  • Qualified Purpose

Any qualifying research expenditures that require software use must also pass the standards set in the High Threshold of Innovation Test to prove eligibility.

Adhering to the Consistency Requirement
The Consistency Requirement mandates taxpayers to define QREs the same from year to year to prevent inaccurately calculated tax credits. All qualifying businesses must also show consistency between the base year and the credit year, with gross receipts in the base years agreeing with the average of the previous four years. 

Maintain Audit Compliant Documentation
All taxpayers filing for the research and development tax credit should hold easily accessible documentation and reports to support QREs. Ledger charts of account, org charts, accounting approach used, wages paid, supply expenses, and fixed based percentage calculations are a few examples of documentation that may be required when filing for the R&D tax credit.

Acena Consulting Streamlines R&D Tax Credit Documentation

Acena Consulting’s experienced R&D tax credit professionals specialize in documentation compliance to deliver an expedited and convenient filing process. Contact us today to schedule an appointment.


Brad Mols

Brad Mols

Acena Consulting Partner. Brad is a licensed CPA that has guided a broad range of clients in the manufacturing, technology, architecture, and engineering industries through specialized tax credits and incentives engagements.