The IRS has been pretty clear in their public statements about proper documentation for taking an R&D tax credit; “it depends on”.
I can appreciate their approach, I mean; we are talking about tax, right? Rules change with the whims of Congress and special interest lobby constantly.
Over the last few years, the documentation standards for the research tax credit have gone from broad to very narrow and unreasonable to something that is reasonable for taxpayers to manage.
Where are we today?
You would like to think we are all on the same page when it comes to both settings and executing on proper documentation for R&D tax credits. I think we are getting closer on an area of tax that will always have some gray and controversy.
The Audit Techniques Guide for the Research Tax Credit does provide some guidance for taxpayers hoping to sustain their R&D tax credit.
In general, assuming your projects meet the 4-part test, it is important to link people to the projects they are working on and, ideally, link them to tasks they are performing in the development cycle. This information should be developed contemporaneously rather than at year-end. Simple, right?
Actually it can be easily done with the right system and approach to adoption internally.
If your company is taking substantial research tax credits, it would be wise to invest in the right system and right approach. I promise you, it will be cheaper than the tax attorney or CPA you will need to hire to defend you during your IRS audit.
The IRS has issued several Audit Technique Guides for agents to review if faced with an R&D tax credit claim. The Guide issued in June 2005 goes through a detailed discussion of many of the definitions and rules related to the R&D tax credit.
IRS Audit Technique Guides
The Guide issued in May 2008 is more focused on how taxpayers are documenting and substantiating their research tax credit claims and provides agents with some tools and suggestions for their audit.
Both Guides are good resources for taxpayers to learn more about the R&D tax credit and understand the types of documentation that might be acceptable if audited.
You can download either ATG by following the links below:
What say you my friends?
How has your company looked at documenting the R&D tax credit?
What basis do you have to substantiate any estimates you are using?
How might you improve your current R&D tax credit documentation process?
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.