The research and development tax program offers business owners extensive benefits and cash flow opportunities. Unfortunately, only a small percentage of qualifying companies actually leverage the advantages of the R&D tax credit due to the misconceptions (and often, a healthy dose of fear) surrounding all the required paperwork. Yes, developing a thorough documentation approach to the innovation tax credit can feel challenging at first, but it is possible to arm yourself with the information needed to simplify the process.
A comprehensive and formal documentation process is the best way to maintain compliance and mitigate unnecessary risk. Here's what you need to know about R&D tax credit documentation to maintain compliance and safeguard your business in the event of an audit.
Establish a Protocol for Formal Documentation
Many companies that participate in the innovation tax credit program treat formal documentation as an afterthought, waiting until it’s time to file to finally begin compiling necessary data. Don't wait until tax time to gather what you need to demonstrate eligibility and compliance. Develop a protocol across all relevant departments that details exactly what should be tracked and logged throughout the year. Communicate the new standards and reporting methods to all shareholders, forever eliminating last-minute data backtracking.
Outline the Why
The most important detail to document with your research and development activities is why a specific project or operation meets the program's requirements. Every qualifying research project must pass a four-part test. Eligible projects may include:
- Using trade secret or patentable intelligence to develop a product or process
- Improving existing processes or products
- Developing new technology to keep pace within the competitive marketplace
- Creating or enhancing testing or quality controls
- Overcoming technical uncertainties to meet client product or performance specifications
Best of all, the R&D tax credit program doesn't require development success for classification as an eligible expense. Even abandoned or failed attempts to develop new and improved procedures or technology may still qualify as a research and development initiative. Once an operation successfully passes the test, it's critical to gather as many specific details about the activity as possible.
Report With Clarity
Having detailed, clearly written reports is your best weapon of defense during an audit. If the IRS can't easily understand the information you've submitted about your processes, it could impact your final R&D tax benefit. Submitting concise, relevant, and accurate information can play a crucial role in mitigating corporate risk while maximizing access to the benefits your company can claim.
Be Prepared to Discuss Reporting Data
It's important to remember that your corporate practices and policies are specific to your organization. As a result, you may find that even easy-to-read, detailed reports aren't always enough to answer any questions the IRS may have about your procedures. You may also be required to discuss the submitted data to offer further clarity during an audit.
Partner With a Skilled and Qualified R&D Tax Professional
The best way to reduce business risk when making R&D tax credit claims? Partner with an experienced and reputable research and development tax advisor to oversee your documentation process. An R&D tax professional will systematically work through your current initiatives to designate all qualifying expenditures. Your expert team will also aggregate and submit all necessary reports to the IRS, answering any questions to optimize overall program benefits and keep your business interests protected at all times.
Acena Consulting Specializes in R&D Tax Credit Documentation
Don't let paperwork and red tape prevent you from using the research and development tax program to lower tax burden and increase cash flow at your organization. Contact us today to discuss your current initiatives with one of our on-site financial experts.
