Virtually every company I speak to asked “the question” and I don’t mean,
How much are you going to charge me for your work?
“The Question” is always,
How much time will this take away from my business to gather the necessary documents?
Or, stated another way,
Is this important enough to distract us from our business?
The short answer is – it depends (not like you haven’t heard that one before).
Let’s take a look.
Internal Time and Effort at Year – End
Year end is always a busy time for companies as they push inventory out before deadlines, close their financial books, prepare for the financial audit or review, assess the results for the year and prepare the coming year’s budget.
As part of the tax preparation effort, each company needs to provide financial statements, W-2s, 1099s, investments statements, loan statements and a host of other items for their CPA in order to prepare the tax return. When you add in the calculation of a research tax credit, timing can be critical as well as having the right documentation available.
Many of the documents needed for the R&D tax credit study are the same documents needed for the tax return. There are additional documents that are specific to the R&D tax credit that must be gathered and provided to your R&D credit specialist.
In addition to W-2s, 1099s, your tax return, and financial statements or trial balance, your consultant will need:
- a listing of your development projects,
- people and hours spent on each,
- expenses for supplies used up on each project and
- Time with key personnel to qualify each project.
If you have made any business acquisitions, major changes or other significant events, you should discuss them with your R&D credit expert to ensure they are treated properly if applicable.
Easing the pain at year - end
As one of those R&D credit “experts” and a CPA, I recognize that much of the work we do is not at the top of our client’s list of priorities (comes with the territory). At the same time, our work is critical and provides significant tax savings. At year end, our clients have a lot on their plate in terms of time sensitive projects. So, finding a way to streamline the internal document gathering process for the R&D credit can be a big benefit. Here are a few suggestions that may help you better manage the process:
Quarterly project reviews – we perform quarterly reviews with many of our clients and both gather project and hours information as well as qualify the projects. This moves much of the year-end crunch work to points throughout the year.
Time Tracking – While many companies continue to estimate their hours just after the close of year-end for each development project, we recommend daily/weekly time tracking. This takes the guesswork, estimates and another year-end project out of year-end.
Online versus manual tracking – there are a number of online systems that provide a framework for tracking projects and time for R&D projects. Creating an internal process that is efficient can make the year-end R&D documentation very manageable. While costs vary, typically, the cost per year will be less than the lost time at year-end.
Consistent development process – some companies have a defined development process while others do not. Creating a process that is streamlined not only makes innovation less expensive but helps the R&D credit process as well.
What say you my friends?
Does the annual R&D Credit process become a nuisance each year?
Are you using a manual or online system today and what do you like about it?
Would you like to find ways to make your year-end process simpler and more streamlined?
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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.
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