As a professional in the world of tax incentives, preparing studies to document and calculate a client’s tax incentive becomes somewhat structured. Except in the case of incentives like the R&D tax credit where the exact types, breadth and depth of proper documentation still seems to be a mystery to taxpayers, professionals and yes, even taxing authorities. Just last year, an IRS Technical Advisor on the R&D team commented publicly that documentation need by taxpayers to substantiate the R&D credit still varies from taxpayer to taxpayer.
Nope, in the real world, types of documentation can vary widely by taxpayer based on their accounting system, industry and size (still, wouldn’t a better answer have been to provide some structure rather than a high-level answer that doesn’t?). So, to help out our politically challenged IRS Technical Advisor, let’s look at three important components of good R&D tax credit documentation:
A review of recent court cases show that having a current system to track hours on a daily, weekly or monthly basis on a person-by-person basis and project-by-project basis is important to the overall success under audit. Interviews and surveys of people directly involved in the R&D process are important but there is no substitute for contemporaneous documentation.
The devil is in the details; having a process or system in place that tracks more than an employee’s hours provides an even better trail of evidence of both what someone did on a specific project and how much time they spent.
Time is money and some company executives or owners’ eyes glaze over at the thought of documenting hours and tasks. However, an efficient system that is part of the overall project or product development cycle can provide the needed detail and perhaps provide the company with a roadmap that they can use to be more efficient by evaluating the process they are using (and have now documented).
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.
Stay tuned for Part 2 – Navigating the R&D Credit Documentation Minefield