The US Research & Experimentation Tax Credit (R&D Tax Credit) can recover a portion of your salaries, your subcontractor costs, and material costs. This is something we all know from our What are R&D Tax Credits but how do you get started?
In this post, we will share insights on the documents you will need to prepare and how to prepare them effectively.
R&D Tax Credits: What Forms You Need
The R&D tax claim needs to be submitted with your annual corporate tax filing and here are all the necessary forms:
- Form 6765, Credit for Increasing Research Activities.
- Form 3800, General Business Credit. This form has a line that asks for the amount of Credit for Increasing Research Activities.
- Each state will have its own form if it offers a state R&D tax program. If you perform R&D activities in California, you will also need to fill out Form 3523, Research Credit.
- If you qualify for the Social Security offset, you will need to make sure you account for it on Form 941, Employer’s Quarterly Federal Tax Return that is used to report the employer’s portion of Social Security tax. You will also need to fill out and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.
R&D Tax Credits: What Documentation You Need
Your documentation needs to substantiate that the expenditures claimed are eligible for the credit. It needs to fulfill the following criteria:
Firstly, your documentation must be contemporaneous. This means it has to be documented at the time the R&D was done. The bigger the claim, the more documentation you would want to have. For example, let’s say you used a digital transformation agency and your dev team work with them. That big dev cost may be a write-off with R&D tax credits.
Next, your documentation must be dated. You need to prove that the work occurred in the fiscal year you are claiming. Furthermore, your claim needs to highlight technical challenges such that it substantiates the R&D that was done. You might need a technical product manager to do this.
Documentation can be in the following formats:
- Version control for all technical documents
- Prototypes, including software and physical products
- Test documents
- Developer or Engineering Notebooks
- Meeting minutes
- Whiteboard photos
- Invoices/ receipts
- Contractor agreement outlining statement of work
Start gathering all of your documentation as it will help defend your claim in the event of an IRS R&D audit.
R&D Tax Credits: IRS Audits
The IRS may audit your R&D tax claim to determine if the work being done meets the four part test and the expenditures claimed can be substantiated.
As a result of the audit, the IRS may allow or deny some or all of the R&D credit. Credits that have been appropriately identified and supported are generally allowed. Credits that were not appropriately identified and supported often get denied.
If the IRS denies your R&D credit, it may assess a penalty if it finds that the credit was either claimed through negligence or disregard of rules or regulations. Generally, the penalty would be 20 percent of the credit disallowed, i.e., of the tax the IRS believes was underpaid. The IRS may also assess interest due on that 20 percent from the date that the tax should have been paid.
From our experience, R&D tax credits that have backup documentation to substantiate the expenditures claimed do not get denied.
If you have never claimed the R&D tax credit before, either because you did not think you qualify or you could not use the credits, it is a great time to reconsider as the the R&D credit can provide a meaningful cash injection into your business.
R&D Tax Credits: Apply with Boast
Using a software like Boast Capital can help streamline this process. The process to work with the software is simple. It can be broken down into seven steps as follows:
- Operations Assessment and Training: A kick-off meeting where all key personnel are trained on the US R&D program.
- Strategy development: Information collected is analyzed and we will also devise a claim strategy to maximize your tax credits.
- Claim Building: All the necessary technical and financial documentation required for your claim is prepared.
- Quality Assurance: Every claim goes through a rigorous quality assurance process where another consultant reviews the claims from the government’s perspective to ensure all requirements and necessary details are in place.
- Client Approval: We will review your claim with you for final approval before submission.
- Claim Submission: We will also work with your accountant to prepare the necessary tax schedules and file your claim.
If everything looks good, Boast Capital provides a status review to final assessment: They maintain constant communication with the government on your behalf to identify the status of your claim. Should there be an IRS review, we will work with you throughout the process to defend your claim.