How to Document Your R&D Activities

Claiming R&D tax credits can be overwhelming for small businesses. To claim an R&D tax credit, a company must document its R&D activities and report them to the IRS. Here’s the rundown of what you will need to do.  

.  .  .  .  .  .

1. Compile Financial Information

Payroll Records

Employers must send payroll documents for employees performing R&D activities and supervising or supporting qualified research activities (QRAs). These include federal taxable wages reported on W-2s, stock options, and bonuses. Non-taxable items such as 401ks cannot be included.

Receipts and Invoices for Supplies

Any financial statements relating to supplies can be used for documenting R&D activities. These include receipts from purchasing supplies and invoices charged to other companies. Most supplies other than land can be claimed as business expenses if used for R&D.

.  .  .  .  .  .

2. Fill Out Form 6765

Form 6765 (Credit for Increasing Research Activities) is the tax form small businesses must use to calculate and claim R&D tax credits. Companies must file this form with their income tax returns by the due date. 

.  .  .  .  .  .

3. Log R&D Activities

It is crucial to keep track of all R&D activities in an organization. One way to log activity is to have all employees track all their activities. Another method is to designate a department head or supervisor to oversee R&D. They can use a project time-tracking solution that precisely documents time, allowing the IRS to quantify R&D activities. By logging activities, a business can ensure that they qualify for R&D tax credits. 

.  .  .  .  .  .

4. Research Credit Computation Documents

The research credit computation documents are necessary to determine if a business has correctly calculated the credit for the year they are filing. However, the actual calculation must be done on form 6765.

.  .  .  .  .  .

5. Document Contract Research Expenses

Contract research expenses are costs paid or incurred by a company with a third party conducting qualified R&D activities on their behalf. A qualified contract research expense is 65% of any R&D expense done outside the company and the amount a business can claim. Businesses must keep documents detailing the agreement between the company and contractor to have thorough documentation.

.  .  .  .  .  .

While documenting R&D activities involves several steps, we make the process easier with our team of R&D tax credit experts. Our team supports your business throughout the whole tax credit claiming process. Contact us to learn how MainStreet can simplify the process of claiming R&D tax credits.