Sustaining R&D Tax Credits under audit should be focused on quantitative and qualitative documentation

 

Congress continues to reward US companies for their efforts to find and develop new technologies, new industries and, as a result, more jobs for US citizens. However, guidance on proper documentation for these efforts has been a moving target since the R&D tax credit was launched in 1981. Congress, the Internal Revenue Service and our judicial system continue to battle over proper documentation of activities and expenses.

 

Taking an R&D tax credit today is less about qualified activities and more about proper documentation. As a result, US companies who deserve these tax credits are not able to sustain their R&D tax credit claims under audit due to insufficient documentation.

 

How did we get here?

While the standards for documenting time and effort related to qualified R&D projects has always been focused on source documentation such as W-2s and general ledgers, the use of estimates to substantiate certain base calculations was accepted for many years due to court decisions that allowed their use. Recently, however, the IRS has taken a different stance, requiring companies to produce source documentation specific to qualified R&D projects from the 1984-88 period in order to take an R&D tax credit. Most companies do not have documentation that can identify specific projects, the individuals involved and how they qualify for the R&D credit.

How can we meet the documentation standards?

Taking R&D tax credits is an important component of a competitive market strategy. Understanding the expenses that need to be documented as well as how to properly document qualified R&D activities can mean the difference between a substantial tax savings and lost profits due to a higher federal and state tax burden.

Creating a proper system to document your R&D activities and expenses should blend into your internal processes not create additional burdens that are cumbersome.

At Acena Consulting, our focus is helping companies and their CPAs to better understand R&D Credits and assisting in the development and implementation of proper documentation systems to sustain their R&D Credit if needed.

 

Contact us today to help develop a proper documentation system for your R&D activities and tax savings through the R&D tax credit at info@acenaconsulting.com.