The Research and Development (R&D) Tax Credit offers invaluable incentives to business owners across a wide range of industry verticals. Unfortunately, each year many companies miss out on qualifying R&D tax benefits for a multitude of reasons. One of the biggest factors prohibiting companies in every vertical from claiming earned credits is a lack of understanding regarding what needs to be documented and submitted to prove program eligibility.
At Acena Consulting, our team of experienced tax credit advisors is dedicated to helping organizations like yours find, complete, and collect the right documentation to claim and benefit from the R&D Tax Credit. We make it our mission not only to ensure our clients receive every R&D deduction possible for maximum cash flow potential, but also to follow proper documentation protocol to protect your business assets. Our detailed research tax credit checklist can give you a better understanding of submission requirements for seamless deduction eligibility with every filing.
The R&D scope includes the framework of items that secures your business's R&D tax credit eligibility:
Form 6765
This form must be completed properly in accordance with the instructions and attached to the tax return.
Research Credit Claims
This documentation outlines a tax overpayment for the tax year being generated (part or whole) by the R&D credit that was not taken into account with the original return. If this has happened, a claim may be filed on an amended return with Form 1120X or 1139, depending on the situation. Taxpayers must submit the actual calculation of the R&D credit on Form 6765, providing the detail and total for the credit.
Computation Work Papers
While the work papers need not be submitted, these include the research credit computation work papers for the years the claim is being filed. This should include the reconciled amounts from Form 6765 as well as provide current year Qualified Research Expenses (QREs), including the wage reports, supplies, and research expenses. Lastly, if the company has other entities that meet the definition of a Controlled Group (i.e., under common control within section 41(f)(1)(B)), they must perform additional calculations and include information from all entities (regardless of whether the other entities have qualified R&D activities), add additional disclosures that are attached to Form 6765, and supply all members with detailed information and receipts.
Conducting a review of any mechanical computation in the R&D tax credit plays a vital role in the examination process. To satisfy audit protocol, all required documentation should be available to determine that the taxpayer has properly calculated the credit for the year being submitted. If estimates were used in the computation review, it's critical to have documentation available that outlines how the estimates were formed.
QREs are the sum of your in-house and contract research expenses and include:
Wages
Wages and salaries generally make up the biggest single R&D deduction. It's important to note that you must utilize U.S. labor in your development to qualify for the credit. As a business owner, you may claim any payment to an employee for the qualified services performed. Additionally, wages paid to direct supervisors that provide technical insight to engineers may also qualify for the research and development deduction.
Supplies
Payments made for any necessary supplies and materials used during the qualified research activities are eligible for the innovation tax credit.
Contract Research Expenses
Business owners may also claim payments to an outside party for conducting qualified research activities.
Taxpayers must use a four-part test to demonstrate evidence of how and why the qualified research activities qualify for the credit. The four-part R&D tax claim test includes:
Business Component Test
Are the research activities being conducted to cultivate or improve on a business component?
Discovering Technological Information Test
Do the research activities eliminate technical uncertainties discovered at the beginning or during the research process?
Process of Experimentation Test
Is there a process of experimentation conducted that evaluates alternatives or utilizes scientific methods to alleviate technical uncertainties?
Use of Scientific Principles
Is the Process of Experimentation based on the principles of the hard sciences?
Taxpayers must be able to provide completed documentation of all activities performed that meet the requirements of all four above test to receive eligibility credit.
Note: For internal use software, taxpayers must also meet the High Threshold of Innovation Test.
The Consistency Requirement mandates that, for purposes of calculating the fixed-base percentage, the QREs of the credit year, as well as the QREs of the base years, be developed on a consistent basis. The Consistency Requirement attempts to achieve uniformity by ensuring qualified research expenses in the past are developed in the same way as the current year. This taxpayer obligation also helps substantiate a rise in the qualified research expenses as a percentage of gross receipts, relative to the base period. Base year expenses must be documented and can be an area of concern if the taxpayer must use the 1984-88 method for calculating the fixed base percentage.
At Acena Consulting, we know that keeping up with the continuously changing landscape of required research and development documentation is a full-time job. Our experienced tax credit professionals partner with small to mid-sized businesses in every operational vertical to navigate through the seemingly endless piles of paperwork and leverage every tax credit benefit available to them. Contact us today to learn more about how we can create a customized documentation process that helps your business substantiate and sustain its R&D tax credit claim.
For more information on R&D tax credit documentation, view Breaking Down the Basics of R&D Tax Credit Documentation. For more information on R&D tax credits, check out our Cheat Sheet. Or, calculate your estimated R&D tax credits with our R&D Calculator.