Best Practices: What documents should we be retaining to claim the R&D Credit?

Q: What documents should we be retaining to claim the R&D Credit?

The MASSIE team answers:

While there is no set document threshold for claiming the R&D Credit, taxpayers must keep reasonable records in accordance with the Internal Revenue Code section 6001 and recent case law. Documents can be separated into two areas:

  • documents related to expenditures, and
  • documents that substantiate activities in which the taxpayer is seeking to qualify.

For cost tracking, documents such as:

  • payroll reports,
  • general ledgers,
  • contractor invoices and contracts, and
  • supply or job costing reports are a great place to start.

For the activities portion, documents related to the technical uncertainty and the process of experimentation undertaken to solve the uncertainties should be retained. Some documents which highlight the process of experimentation could include:

  • technical recommendations/specifications,
  • process flowcharts,
  • design drawings,
  • email correspondence, and
  • testing procedures/reports.

All of the records above are helpful in properly documenting the qualifying activities. Depending on the documentation available and your unique business workflow, there can be a multitude of best practices concerning R&D documentation retention. The pinnacle of a successful document retention program would be contemporaneously collecting the documents as a particular project progresses. This prevents key documents from being misplaced or deleted once the project reaches completion. Another great option for taxpayers would be a semi-annual or annual collection of documents that relate to the company’s R&D projects. Coordination with our tax team and your internal IT group can help ensure that the correct documents are being preserved and your R&D claim is being fully substantiated.

The MASSIE Method

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