The R&D tax credit code and regulations do not specify record-keeping requirements. However, the guidance provided to taxpayers is that they must retain documentation to substantiate the credits being claimed. Project documentation is used to demonstrate the qualified nature of research activities.
To qualify for the R&D tax credit, a project must:
1) relate to a new or improved business component
2) be technological in nature
3) face technical uncertainties at the outset of the project
4) utilize a process of experimentation to overcome the uncertainties.
Taxpayers under audit are often asked to provide project narratives describing how qualified projects meet this four-part test. This is often accomplished through an overview of the project’s goals and objectives, describing how the project is unique or different from prior projects, identifying the technical uncertainties, and detailing the process of experimentation associated with the project. Project narratives reduce the risk of having inadequate supporting documentation, especially when the project narrative is created and augmented throughout the course of the project.
Supporting documentation accumulated throughout the life of a project that establishes the project’s goals and uncertainties and demonstrates the process of experimentation is ideal. Project schedules, charters, or reports listing tasks, priorities, status, dates, and names provide valuable contemporaneous documentation that supports the technical nature of work and experimentation. Test data or reports provide evidence of technical uncertainties, experimentation, and evaluation of alternatives. Product descriptions, new product development and engineering procedures, project status updates, CAD drawings, technical emails, revision history, and meeting minutes provide overall details of the project and may further highlight the uncertainties and process of experimentation.
The R&D Tax Credit Experts at Earnd can help your business.