While there are many ways to document activities for the R&D tax credit, ideally, a company should try to document each qualified activity individually. If we keep in mind that the R&D timeline begins at concept inception and ends when the project is ready for commercial production, these dates become important and should be standardized. Many times, initial R&D concept development can come from sales meetings with customers and be the origin of the next R&D project. While sales people typically document their meetings, not all meetings result in a new R&D project. A centralized system should include a standard approach to opening a new project and documenting how the concept started.
At the same time, the end of the project should also be documented consistently. If a company requires and documents approval of design, prototype, testing, etc. this information should be consistently gathered and documented in the same centralized system. In our next blog, we will discuss project qualification and how these dates will form the structure to collecting expenses for each project. In terms of a process and audit trail, standardizing the process provides a clean clear story in the event of an audit.
Additionally, it is important to document the name of the project manager, whether the company retains substantial rights to the research, if the research was done for a specific customer or as part of a contract and whether any part of the research was funded by another. As every company is different, the system that will work best in your company varies greatly. Working with consultants that can evaluate your current processes and help you design the right system can pay significant dividends in terms of strong processes that do not interfere with your operations.
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.