Turn R&D Tax Incentives Into Revenue

This white paper discusses how an automated workforce management solution can help companies claim their R&D Tax Credit by tracking employee and contractor time against specific projects and activities, as well as generate labor audit trails to support the IRS audit process. By speeding and simplifying recordkeeping needed to claim an R&D Tax Credit, the right workforce management solution can make it easier for companies to realize a tax reduction for the current year — and potentially capture and recover credits for up to three previous years — for significant bottom-line impact.

The U.S. Congress recently reduced the documentation requirements and qualification requirements for the R&D Tax Credit, making potential savings available to a broader range of companies.

Because the IRS has designated the R&D Tax Credit as a Tier 1 issue presenting the highest level of compliance risk, those companies that claim credits may be subject to rigorous audits. Therefore, in order to protect their tax advantage, companies need to thoroughly document their R&D activities, a process that includes linking employee and contractor hours to specific projects. But creating detailed documentation that can withstand IRS scrutiny is difficult using manual methods and spreadsheet-based processes.

The R&D Tax Credit is designed to encourage innovation by providing an incentive for businesses to invest in research activities. In Tax Year 2008, the most recent year for which corporate tax return data are available, 12,736  corporations claimed $8.3 billion in research credits.

Why is it that so many companies have yet to take advantage of the R&D Tax Credit? The most commonly cited reasons are lack of time, resources, and expertise to adequately understand the qualification rules and accurately document R&D activities. In addition, many companies fear being audited — a process that can eat up significant time and resources.

When it comes to the federal R&D tax incentive program, companies need to think beyond the traditional definition of research and development. According to current IRS rules, the definition encompasses far more than just laboratory research, ultra-high-tech advancements, or new product development.