Tax credits provide a valuable outlet to increase your bottom line. Therefore, it’s important to keep proper documentation and work with a professional to develop informed tax strategies. In particular, the research and development tax credit allows businesses to significantly reduce their tax liability.

You must be sure to follow IRS rules for the research and development tax credit if you wish to establish proper substantiation for your research claim. In the event of an audit, it is also critical that you have satisfied these requirements so your business does not have to pay penalties and lose the credit.

Discover ways to help your business capture beneficial tax savings by following IRS guidelines for the R&D credit.

The IRS does not require taxpayers to capture the costs of research under a particular accounting methodology, but, according to an IRS Directive, businesses must identify qualified research expenses (QREs) by specific qualified activities. Whatever method or approach your business uses, you must meet this IRS requirement in order to claim the R&D credit.

Many businesses attempt to use a cost-center, or hybrid accounting methodology that does not prove the connection between QREs and qualified research activities (QRAs). The accounting systems used by these companies contain information that identifies expenditures without considering whether research activities meet IRS requirements.

For this reason, it is important to work with tax experts who use tax software made specifically for claiming R&D credits.  Your consulting partner’s proprietary tax software should generate and store standard deliverables in compliance with IRS standard Information Document Requests (IDRs) as well as meet other IRS guidelines for properly capturing the R&D credit.

Gather All the Required Information

One common mistake businesses make in the case of securing supporting documentation is that they do not gather all the available information at the time they are completing the credit calculations.  Gathering documentation is a vital step when claiming R&D activities and expenses. The time between when the business filed its tax return reporting the R&D credit and the time the tax return is selected for audit can be many years.  Often the information is no longer available since source documents can be destroyed or lost over time and key personnel may no longer be with the company.

Therefore, your business should ensure they take the necessary steps to gather all the required and available documentation used to support the credit at the time the tax return is filed.  This practice allows your tax preparer an opportunity to review the information to make sure everything is in order and ensures the supporting documentation will be available in the event of a tax audit.

Consult an Outsourced Tax Expert

Meeting IRS requirements for research and development tax credits is a complicated process for businesses that don’t have experience with this tax strategy. However, partnering with tax experts allow you to effectively capture the R&D credit with minimal disruption to your daily operations.

If you have questions about how to support your R&D credit claims or how to maximize tax savings, speak with a tax consultant at CTI today. CTI is able to guide you through the submission process, help you reduce your chance of an audit and protect your tax credit claims in the event of an audit.

Ready to learn more about how R&D credits benefit your business? Learn how to effectively capture the research and development tax credit.