Businesses and CPA firms alike are hesitant to cash-in on one of the most lucrative tax credits out there: the research and development (R&D) tax credit. Why? Because the risk of a R&D information leak or an IRS audit is deemed too high to be worth the reduction in tax liability.
Fortunately for your company (or CPA clients), the federal research and development tax credit doesn’t have to present those risks – if you know how to do it right.
Here are a few guidelines to help your firm claim the lucrative R&D tax credit without risking your research or an audit:Clearly Demonstrate And Document Your R&D Activities
Without properly documenting your research and development expenses, you might not receive your R&D tax credits at all, so it’s vital that you clearly and thoroughly document all of your R&D activities.
The most common forms of documentation required by the IRS include:
- Difficulties your company faced trying to achieve your R&D objectives
- Issues or challenges you encountered during research and development work
- Processes your company used to resolve uncertainties or answer technical questions
- Scientific records that support that your R&D activities are technological in nature (whether in terms of physical, biological, engineering or computer sciences)
Formal project reports are the most effective means of documentation for IRS consideration, but dated technical notes, designs and drawings, patents, memoranda, test results, earnings reports, invoices and other records are also important.
In addition, companies should provide documentation that links employees’ time directly to an R&D project or activity. This documentation might follow one of two methods: the project approach or the departmental approach.
The project approach requires time-tracking documentation to directly link your employees’ hours to a specific, qualified R&D project. The departmental approach relies on oral testimony, contemporaneous engineering documentation, job descriptions, educational background and other information to develop a time estimate.
In either case, you should have a qualified tax advisor guide you through any regulatory requirements to ensure you have the proper documentation to present to the IRS. As R&D tax credits increase in terms of compliance, audits and information security, it’s essential that you properly document all research and development costs and have an audit-ready deliverable to fully support your credit claims.
Thoroughly Protect Your Data Throughout The Process
In an age when security breaches routinely make the nightly news, protecting your data is more important than ever – both in the R&D process and in submitting your claims for the R&D tax credit.
Whether you’re completing your own R&D tax credit documentation or whether you’re working with a tax credit specialist, you need to ensure you have the most robust forms of physical, digital and personnel securities in place so that your proprietary information isn’t leaked into the wrong hands.
When working with an external tax credit specialist, check to see if they are ISO/IEC 27001:2005 certified. Commonly known as ISO 27001, this international certification signifies that a firm complies with the world’s most rigorous information security standards.
ISO 27001 provides an exhaustive set of best practices to establish, maintain and improve an information security management system (ISMS) that protects data throughout every corner of the company. And, rather than rely on tools and technology alone, ISO 27001 standards involve a firm’s people and processes, so that everything and everyone works together to keep your information secure.
If your tax credit specialist isn’t ISO 27001 certified (or if they haven’t passed their annual audit), you should look for a different tax advisory partner, because your R&D data is too valuable to risk.
Concerns over data safety or a potential audit shouldn’t hold your company (or client) back from claiming the R&D tax credit. Instead, use the guidelines above to cash in on this lucrative tax credit and you’ll appreciate the return on your investment.
Want more insight on claiming the research and development tax credit for your business? Click below to download an insider’s guide from Corporate Tax Incentives and discover how to turn this confusing tax credit into a conquest for your company’s bottom line. 
