Business is full of challenges and facing (and defeating) those challenges are critical to the success of a business. To be competitive, it's important to take advantage of those opportunities that have been provided legislatively.
What does that mean at a tactical level?
It means taking advantage of tax deductions, credits and grants as they apply to your business, industry and customer base. Whether your application of tax law is aggressive or conservative,
the federal and state governments have the right to review and inspect your documentation to confirm that your tax return has been completed and submitted correctly.
When we look at the research and development tax credit, audits by the IRS and state tax agencies have ranged from minimal reviews to very invasive and detailed audits that can last for more than a year.
So how do you get through the audit quickly and efficiently?
Similar to football, our philosophy is that a great defense is critical to winning. If quality and detail are built into the process, companies will create the necessary documentation to not survive but sustain completely the tax credits they have applied to receive.
Do your internal processes track the number of hours each employee spends on a development project?
Do your employees record the tasks they are completing? Can they record their time quickly without disrupting their day?
As important as it is to track time on projects (and it is critical to create the tracking), if the system is cumbersome and difficult, employees won't be diligent at tracking their time.
What needs to be tracked?
The IRS Audit Techniques Guide for Research and Development Tax Credits instructs its agents to identify the people working on various development projects and the amount of time they spend. If you don't track people hours specific to projects, recreating those hours can be both difficult and hard to defend.
Additionally, each development project needs to qualify under the IRS regulations as a qualified research project. This requires an evaluation of the more subjective elements of the project and also needs to be documented for each project. For more information on the specifics of the 4 part test, please see Navigating the R&D Tax Credit Minefield (part 2).
Do we need to evaluate every project?
That depends on whether you want every project that qualifies to withstand an audit. The IRS allows both statistical and judgment sampling to be used to evaluate projects and apply the results across the entire population. The sampling must follow the guidelines provided by the IRS but can save time. The negative to using judgment sampling is the potential elimination of qualified projects due to the random nature used for judgment sampling.
Our recommendation is to develop a process that is efficient and can easily manage all projects. In this fashion you will maximize your R&D credit and more importantly, solidify your documentation in the event of an audit.
Acena Consulting, LLC
Acena Consulting focuses on helping our clients develop internal systems to better track their efforts in efficient ways to create the necessary documentation without adding significant time to the process. If you or your client is either under audit for their research tax credit or wants help setting up a strong documentation process, we can provide the help you seek. By setting up efficient processes, it helps us more quickly complete the year end study and calculations.
Save Time, save money....go Acena Consulting for your R&D Tax Credit studies
What say you?
Does your company track people, projects and hours on your development projects?
How strong is your documentation system?
Under audit today?
We can help immediately to manage your audit from prior years with documentation today...just ask.
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on R&D tax credits and other US tax incentives.