When filing for the Research and Development tax credit, it's all about the paperwork. Proper documentation of Qualified Research Expenditures (QREs) and tracking a myriad of other factors all come into play to ensure that business owners not only optimize their overall return but also maintain compliance to protect their corporate interests in the event of an audit. Unfortunately, each year, countless entrepreneurs across multiple industries miss out on using the R&D tax credit to reduce their overall tax burden and maximize bottom line profits simply because they aren't sure how to document all eligible expenses and activities.
Don't let a little paperwork prevent you from tapping into the many cash flow opportunities offered through the innovation tax credit. Following Acena Consulting's six-step research tax credit checklist can help keep you focused on what you'll need for documented proof when you're ready to file next season.
Document Framework
The first step in navigating through the tracking process is to understand the framework of required documents that establish your organization's eligibility for the research and development tax credit. This includes completion of Form 6765, which should be attached to the tax return. You should also have completed computation work papers for the years the claim is being filed.
Research Credit Computation
One key component of the process is a thorough review of the mechanical computation. Recently, the calculation has changed for companies electing the Section 280C(c) election that provides more benefit to the taxpayer.
QREs: Qualified Research Expenditures
Your company's QREs represent the total of both internal and contracted R&D costs. Some of the most common QREs that require complete and current documentation include the wages of employees involved in the qualified R&D projects (including both supervisors offering technical insight and direction as well as staff directly supporting the R&D projects), and required non-depreciable equipment, materials, and supplies used to perform R&D activities. Additionally, outside research expenses paid to contractors conducting eligible tasks may also receive QRE status.
Qualified Research Activities
Every qualifying research activity must undergo (and pass) a 4-part test to validate R&D tax credit eligibility. The guidelines of the test mandate that every qualified activity must:
- Create or improve a business component
- Eliminate technical uncertainties
- Include a process of experimentation
- Use scientific principles in the process of experimentation
Additionally, for any activities that require the use of software, the taxpaying entity must also meet the requirements of the High Threshold of Innovation Test to qualify for the R&D tax credit.
QRE Consistency Requirement
The R&D tax credit Consistency Requirement is specifically designed to avoid claim distortion by accurately gauging the relative upswing in QREs beyond the expenses generally incurred by the taxpayer based on gross receipts. The regular R&D credit calculation method includes the use of a base year computation and requires that the types of expenses used in the base calculation be consistent with the types of expenses used for the current year. Documenting the base year can be difficult if information from past years is not available and complete.
Audit Specific Documentation
Finally, the IRS mandates that all taxpayers filing for the R&D tax credit should maintain accessible and usable reports to support the eligibility of all claimed expenditures. Some of these required supporting documents may include:
- Org charts
- General ledger charts of accounts
- Fixed based percentage calculations
- Specific accounting approach utilized based on project or department
- Details of wages paid, including information of employee and qualified R&D activity
- Details about all supplies, by project and how they were paid
- Outside vendor contracts
At Acena Consulting, we recognize that the dread of paperwork can prevent even the most motivated business owner from maximizing research and development deductions and returns come tax time. We offer entrepreneurs and financial professionals access to our team of skilled and experienced R&D tax credit experts who specialize in the documentation process for a stress-free filing process that maximizes program benefits and maintains your corporate compliance during an audit. Contact us today to learn more about our customized approach to research and development documentation.
