R&D Credit Documentation

Following the IRS, solely interviewing employees to reconstruct activities believed to qualify for the credit is generally insufficient without additional evidence.

Requested Records

During an audit (review), we may request records generated at the time the research activities were performed.

Some examples include, but are not limited to the following:

Research Activities

• List of your research activities – your new or improved business components and location where activity was conducted.
• Description of the new or improved function, performance, reliability, or quality of each of these business components.
• Description of the process of experimentation, in chronological order, of all the steps or activities undertaken when developing or improving a product or business component. For example, present a time-line description of the company’s development processes and procedures.
• Documentation showing the scope of the research activities, including things like the problem to solve, potential solutions, concerns, and project authorization requests.
• Procedure manual, project checklist, technical abstract, lab schedule, lab report, project status report, summary experiment data results, etc. for products or business components developed or improved, and claimed for the research credit.
• Issue logs, meeting minutes, chronological timeline, internal memos, emails, patent applications, abstracts, work orders, budgets, capital addition requests, purchase orders, invoices, contractual agreements with customers, grants, etc. related to the research.
• Workpapers generated while calculating the credit.

Wages

• Organizational chart.
• Names and work titles of the employees whose wages are included in the computation.  Also include:
• Position description, what each employee did, and the amount of their time and wages included in the credit.
• Timesheets covering the time.
• Social Security numbers and W2s.
• Any other documentation tying them to the R&D credit claim.
• Breakdown of wages claimed by employee, year and qualified project.

Supplies

• List of the supplies claimed showing they are tangible property (link to definition, or provide definition of) used in conducting qualified research and used or consumed by an employee of the company performing qualified activities, the corresponding amount, and invoices.
• Supplies do not include: land and land improvements, capital equipment, or general and administrative supplies such as travel or telephone expenses.

Contracted Research

• Names, addresses, and FEINs of any contractors and amount claimed for each contractor.
• The location where the contractor conducted the claimed activities.
• Description of the research activities performed.
• Description of ownership relationships between the company claiming the credit and the contractor.
• Contractual agreements and invoices. 

On September 11, 2017, the IRS issued a Directive providing guidance on an efficient examination process it uses for eligible Large Business and International taxpayers (LB&I) claiming the federal Credit for Increasing Research Activities (R&D credit).

On September 10, 2020, the IRS issued a Directive modifying this guidance. The 2020 Directive does not replace the 2017 Directive.

Follow the 2020 Directive if you are eligible to use it for filing returns for tax periods ending on or after July 31, 2020. View the 2020 Directive on the IRS website

Follow the 2017 Directive if you are eligible to use it for filing returns due on or after September 11, 2017, for tax periods ending before July 31, 2020. View the 2017 Directive on the IRS website

Eligibility

Both directives provide an efficient examination process used by the IRS for determining qualified research expenses (QREs). You are eligible for the process if you are an LB&I taxpayer and meet all these requirements:

• Have assets equal to or greater than $10 million
• Follow U.S. generally accepted accounting principles (GAAP) to prepare your Certified Audited Financial Statements showing the amount of currently expensed Financial Statement R&D either as:
  • a separate line item on your Certified Audited Financial Statements, or
  • separately stated in a note to your Certified Audited Financial Statements
• Use the same U.S. GAAP financial statements to reconcile book income to federal tax income on Schedule M-3

You must also complete and sign a Certification Statement and provide specific documentation when requested during an audit.

Impact on Minnesota

The Minnesota Department of Revenue will generally follow the 2020 Directive and allow the use of U.S. GAAP expenditures for calculating the Minnesota R&D credit.

If you follow the 2020 Directive and related guidance, you must make these changes to your federal calculations when computing the credit for Minnesota purposes:

• Subtract all U.S. ASC 730 Financial Statement R&D In-house Research performed outside Minnesota from the Computation of Adjusted ASC 730 Financial Statement R&D under the IRS Directive Appendix C, Line 9
• Include only wages attributed to qualified research conducted within Minnesota for the Adjusted ASC 730 Financial Statement R&D Wage Detail under the IRS Directive Appendix D

Minnesota Audits

We will not follow Part II C in the 2020 Directive, which requires federal auditors to receive approval before requesting additional information not listed in the 2020 Directive. Minnesota auditors do not need to receive approval before requesting other relevant documentation during an audit.

We may request documentation for each tax period you used the directives for Minnesota purposes, such as:

• A copy of the completed and signed Certification Statement filed with the IRS
• All U.S. ASC 730 Financial Statement R&D In-house Research performed outside of Minnesota