R&D Tax Credit — What documents are required for the claim?

The Research and Development Tax Credit is a tax incentive that is a huge benefit for business owners across various industries. In case you are eligible to claim this credit, you have to be ready with certain documents.

Here is a list of required documents:

1) Documents that have to be submitted with the claim

• Form 6765, Credit for Increasing Research Activities.
• Form 3800, General Business Credit. This form has a line that asks for the amount of Credit for Increasing Research Activities.
• Each state will have its own form if it offers a state R&D tax program. If you perform R&D activities in California, you will also need to fill out Form 3523, Research Credit.
• If you qualify for the Social Security offset, you will need to make sure you account for it on Form 941, Employer’s Quarterly Federal Tax Return that is used to report the employer’s portion of Social Security tax. You will also need to fill out and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.

2) Credit computation documents

It is essential to have computation work papers to indicate how the Qualified Research Expenditures for R&D tax credit were determined along with associated evidence of the R&D work performed. All the documents that show that the taxpayer has calculated the credit for the year accurately should be available. In case of use of estimates for computation, keep documents ready that show how you formed the estimates.

3) QREs (Qualified Research Expenses)

This is the total expenditure on the research activities which include the following:

• Wages

Wages of employees (W2 document) involved in the R&D activities typically end up being the largest portion of the Qualified Research Expenditures. The employees involved need to have been working in the US in order to be eligible for the credit.

• Supplies

You can claim the cost of materials and supplies utilized in the R&D activities, including extraordinary utilities, excluding capital items or general administrative supplies. E.g., supplies consumed or transformed in developing a prototype for a hardware product.

• Expenses of contract research

In case you have employed a third party to carry out research on your behalf, you can make a claim for the payment made to them.

• Off-Premise Lease Computer Costs

These are hosting costs related to the R&D work, such as Amazon Web Services.

4) The four-part test for research activities to qualify for a claim

As a taxpayer and business owner, you have to qualify in a 4 part test and that is the following:

• Part 1 — Permitted Purpose

Is the purpose of carrying out the research activities to develop a new or improved business component.

• Part 2 — Elimination of Uncertainties

Did you encounter technological uncertainties where publicly available information and knowledge cannot be applied to achieve the desired result?

• Part 3 — Process of Experimentation

Did you utilize a systematic process to assess alternatives so as to overcome technological uncertainties and achieve the desired result?

• Part 4 — Technological in Nature

Are the methods used in carrying out research activities based on hard sciences like physics, chemistry, engineering, or computer science?

So, this was the 4 part test. As a taxpayer, you must be able to produce all of the above in a documented form.

5) Audit documents

You have to keep certain documents in place when there is an Internal Document Request (IDR). They include organizational charts, general ledger, computation method used to determine the Qualified Research Expenditures, documentation of the R&D work performed, wages paid to R&D employees, time tracking for R&D employees, list of supplies used, contract research agreements, and invoices.