R&D Tax Credit Documentation Requirements

The federal R&D credit is claimed on IRS Form 6765. However, in order to properly document and substantiate the figures on Form 6765, the IRS requires evidence of qualifying R&D activity and quantification of the credit. What does this mean for your business? Every dollar of credit has to be backed up by documentation proving that the inputs into the R&D credit formula are attributable to qualifying R&D activity. However, there is no specific documentation requirement. For example, the IRS does not require timetracking data to ensure traceability of qualifying R&D expenses. In fact, the IRS allows the use of reasonable estimates of R&D expenses.

All of this is to say that, while R&D credit documentation, like the R&D tax credit form 6765, is of utmost importance to your credit claim, the way in which you can provide documentation is flexible. Our R&D advisory team at Endeavor Advisors can determine what level of R&D tax credit documentation is needed for each qualifying tranche of R&D expense. Often an R&D advisor will conduct interviews with managers and owners with intimate knowledge of their labor force in order to extrapolate reasonable estimates on certain R&D expenses.

What really matters is that, at the end of a study, a report is produced that can properly substantiate the credit numbers, expenses, and elections that ultimately end up on your Form 6567 or state tax filings.