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How to Avoid Risk When Applying for R&D Tax Credit

Sep 13, 2018

applying for the R&D tax credit

When applying for an R&D tax credit, you want to be sure you're doing everything properly to avoid unnecessary risk. One way to do that is to make sure you have all the documentation you need, follow a formal documentation process, and ask questions of your tax professional to ensure clarity.

Although it may sound daunting at first, these steps can make the process simple and easy while securing the R&D tax credits you need to improve your business.

Document Why Projects or Activities Meet the Requirements

When putting together documentation to support your R&D tax credit application, it really all comes down to proving why the activity in question meets the government's tax credit requirements. This means there is no set list of documents that you need to complete. It will all depend on the type of qualifying project or activity you're applying for.

Your R&D tax professional can offer insight into the exact kinds of documentation  required. But generally, any reports, notes, or process documents that offer a detailed look at the activity, not just a broad summary, should be included.

Here's another way to look at it: First, gauge whether an activity meets the R&D tax credit standards by using the Four-Part Test. Then, check to see if your documents offer proof that the activity meets the components of the Four-Part Test. If they do, those are the proper documents to include in your R&D tax credit application.

Implement a Formal Documentation Process

Too often documentation is an afterthought, leading to headaches when it comes time to actually apply for the R&D tax credit. A simple way to avoid those problems is to implement a formal documentation procedure throughout your R&D process.

After consulting with your tax professional and using the Four-Part Test as described above, you should have a good idea of what will be needed.  Communicate those needs to your team leaders and establish a reporting method for each business segment. If everyone is flagging relevant documents and compiling them in a central location throughout the R&D process, it will be much easier to secure your R&D tax credit.

Make Sure You're Writing Clear and Relevant Reports

In the event of an audit, if the IRS isn't able to understand your reports, you're not likely to receive the R&D tax credit you're looking for. Making sure the documents you submit are clear and accurate is crucial for limiting risk and securing those valuable credits.

Keep in mind that because your process is unique, the IRS will also need some help understanding exactly how each activity fits into the greater R&D process. But you don't want to make an IRS agent wade through scores of documents that don't relate to the R&D tax credit requirements, either. Consult with your R&D tax professional to make sure all documentation is both relevant and clear with regards to your R&D procedures. They can offer valuable insight on all aspects of the documentation process.

By implementing a system to identify the proper supporting documentation throughout the R&D process, and then checking to make sure those reports are relevant and provide clarity to the IRS, you can minimize risk while securing valuable R&D tax credits.

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