Article written by Guest Author:
Tom Moul, CPA, Principal
Stambaugh Ness

One of the more critical elements of utilizing the R&D credit is your firm’s ability to track related data appropriately. As a refresher, the Research & Development (R&D) tax credit rewards firms for engaging in qualified research activities (QRAs) by providing a credit for a portion of their qualified research expenditures (QREs) resulting from these activities. To be recognized as a QRA, an activity must pass a four-part test, plus the firm must present documentation that corroborates the test requirements. Now let’s walk through the steps you must take to ensure your qualifying activity documentation stands on data you can be confident in.

Data Is At The Heart Of R&D Qualification

The reality is that your firm may have many qualifying activities, but if you can’t back them up with supporting data, they will not be approved for the tax credit. The IRS provides very little guidance to taxpayers about what they consider adequate documentation for the R&D credit. Current regulations state that those firms claiming R&D tax credits must retain records in a sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.

The key takeaway here is to track data throughout the year. So many firms attempt to collect information right before submitting for the credit and face the challenge of trying to piece things together OR worse they give up altogether because it seems too overwhelming. Setting up a process to track throughout the year will save you significant time and money, plus there will be less chance of inaccuracies.

First Things First

The most significant challenge firms face is accurately capturing R&D project related time, expenses, and historical data. It’s fair to say that not all accounting and financial platforms are created equal. While many capture surface level data, not all are designed to include more detailed information. Insufficient tracking tools result in firms having to rely on estimates rather than real-time data to substantiate their expenditures. Not exactly what you want to be providing the IRS.

Ideally, adopting an accounting system designed specifically for project-based firms will result in greater tracking success. This type of system makes it much easier to implement a process that manages research and development qualifying projects from beginning to end. It also provides you with one central location to store all project related information including time and expenses. Leveraging real-time numbers allows your firm to generate immediate reports on the progress and costs of your R&D projects and substantiates your credit claims.

Planning Ahead Has Its Rewards

It is absolutely worthwhile to implement a documentation process, even if you’re not able to submit for the credits immediately. Don’t count on remembering everything a year from now. Once you have a process in place, what kind of rewards can you expect from the R&D credit? To learn more about increasing your bottom line by utilizing the R&D credit, along with additional tools and techniques to build future-ready firms, keep an eye out for our upcoming webinar series featuring guest speakers from AE industry leader Stambaugh Ness.


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