Follow KBKG on Social Media
What Businesses and CPAs Should Expect From an R&D Tax Credit Study
A quality R&D tax credit study should give businesses and their CPAs confidence in both the credit calculation and the documentation supporting it. Companies should expect a structured process that identifies qualified activities and expenses, limits disruption to their teams, and creates a defensible record that can be used if the IRS asks questions later.
KBKG Insight
The strongest R&D credit study begins with IRS examination readiness in mind. Businesses should expect their provider to understand how projects, technical activities, employees, and qualified research expenses connect, while keeping the company’s CPA informed throughout the engagement. Gathering those facts during the study creates a clearer record and reduces the need to reconstruct events years later. A quality provider should build that project-to-expense connection as the work progresses so the final documentation can explain why each claimed expense relates to qualified research activities if the IRS examines the credit. KBKG has previously discussed why strong documentation matters and how well-prepared R&D studies can make audits more efficient.
Key Takeaways
- Expect a collaborative process involving finance personnel, technical subject-matter experts, the R&D credit provider, and the company’s CPA.
- Plan to gather payroll, financial, project, contract, and technical records, typically over one to several weeks depending on company size and record accessibility.
- KBKG combines technical tax expertise, structured documentation, CPA coordination, and examination-focused methodology to provide a thorough and efficient R&D credit study.
Background
An R&D tax credit study generally follows a structured process designed to identify qualifying activities, calculate qualified research expenses, and build documentation that can support the credit if it is later examined.
1. Initial Qualification Assessment
The study typically begins with a review of the company’s operations, potential research activities, organizational structure, and financial profile. The goal is to identify areas where qualifying research may be occurring and determine which employees, departments, and projects should be evaluated further.
2. Technical Interviews and Project Identification
The R&D tax credit provider interviews engineers, developers, scientists, product leaders, and other subject-matter experts who understand the work performed. These discussions focus on:
- Technical uncertainties the company encountered
- Alternatives or approaches considered
- Testing, modeling, prototyping, or experimentation performed
- New or improved products, processes, software, techniques, or formulas developed
The provider then identifies the projects and activities that may qualify for the research tax credit.
3. Qualified Research Expense Analysis
Once qualifying activities are identified, the provider analyzes the related qualified research expenses (QREs). These generally include:
- Qualified employee wages
- Supplies used in qualified research
- Eligible contract research expenses
A quality study should connect these expenses to the underlying research activities rather than relying solely on high-level estimates.
4. Documentation Gathering
Companies should expect to provide both financial and technical records. Common requests may include:
Financial and personnel records
- Payroll reports and employee rosters
- Job descriptions
- General ledger data
- Supply invoices
- Contractor agreements and invoices
- Project accounting or time-tracking records
Technical and project records
- Project lists and project plans
- Design documents and specifications
- Testing results and prototypes
- Engineering or development notes
- Emails, meeting records, and other contemporaneous documentation
The IRS requires taxpayers to maintain records in sufficient detail to substantiate the credit, making documentation a critical part of the study.
5. How Much Time Should the Company Expect to Spend?
For a small or midsize business, gathering the initial documentation may require several concentrated hours across finance and technical personnel, typically spread over approximately one to two weeks.
Larger organizations, decentralized teams, or companies that need to retrieve older records may need several weeks. A well-managed provider should organize requests, identify missing information early, and consolidate follow-up questions to reduce unnecessary demands on company personnel.
Throughout the process, the company’s role is primarily to provide access to knowledgeable employees and existing records. The R&D tax credit provider should manage the analysis, interviews, follow-up, calculations, and documentation while keeping the company’s CPA informed throughout the engagement.
6. Calculation, Deliverables, and Ongoing Support
After completing the technical and financial analysis, the provider calculates the R&D credit and prepares the supporting documentation.
Depending on the engagement, final deliverables may include:
- Research tax credit calculations and supporting workpapers
- Project or business-component documentation
- Technical narratives and methodology
- QRE support and allocation schedules
- Information needed to support Form 6765
- Coordination with the company’s CPA during return preparation
The engagement should also establish what support is available after the study is completed, including responses to CPA questions and assistance if a federal or state taxing authority later examines the credit.
Conclusion
Businesses should expect an R&D credit engagement to be thorough, collaborative, and efficient. The company supplies access to knowledgeable people, financial information, and existing technical records. The R&D tax credit provider drives the qualification analysis, interviews, expense analysis, calculation, documentation, and follow-up while coordinating with the company’s CPA. The result should be a well-supported credit prepared with future IRS scrutiny in mind.
Action Steps
Businesses considering the R&D tax credit should begin by identifying potential technical projects, the employees involved, and where payroll, accounting, contract, and technical records are maintained. Early organization can reduce disruption and improve the quality of the final study.
Explore KBKG’s R&D Tax Credit Services and additional R&D Tax Credit FAQs for information about qualification and documentation.
If you or your company have questions, or are ready to explore R&D tax credits, you can request a free, no-obligation consultation with KBKG’s experts here.
IRS and Technical Resources
- Read the IRS Instructions for Form 6765, Credit for Increasing Research Activities. Current instructions address qualified research expenses, business-component reporting, and research credit claims.
- Read the IRS Research Credit Claims Audit Techniques Guide. The guide discusses study reports, project documentation, QRE workpapers, and the nexus between research activities and expenses.
See if You Qualify Today
Frequently Asked Questions
An R&D tax credit study is a structured analysis used to identify qualifying research activities, determine eligible expenses, calculate the federal and applicable state credits, and prepare documentation supporting the claim. A strong study connects the company’s technical activities to the employees, supplies, and contractors associated with those activities.
Timing varies with company size, the number of projects and employees involved, and the accessibility of records. Businesses should generally plan for information gathering and interviews to occur over several weeks, with smaller engagements often moving faster when payroll, financial, and technical documentation is readily available.
Common documentation includes payroll reports, employee information, general ledger records, invoices, contractor agreements, project lists, time records, design documents, specifications, testing results, prototypes, development notes, emails, and other records showing what technical work occurred and who performed it. Existing records created during the normal course of business are especially valuable.