R&D Tax Credit Checklist for Business Owners

Tax & Financial Planning

R&D Tax Credit Checklist for Business Owners

Step 1: Determine Eligibility

Before proceeding, verify that your business meets the basic R&D tax credit criteria:

Engaged in developing or improving products, processes, software, formulas, or prototypes.
Faced technological uncertainty during the development process.
Used systematic experimentation (e.g., trial and error, modeling, simulation, or prototyping).
Relied on principles of engineering, computer science, physics, chemistry, or biology.
Conducted R&D within the U.S. (to qualify for federal credits).

Step 2: Identify Qualified Research Expenses (QREs)

Ensure that you properly account for eligible expenses associated with R&D activities. Gather the following at the end of your fiscal year:

Employee Wages & Payroll Expenses

Salaries of employees directly involved in R&D (scientists, engineers, developers, etc.).
Wages of employees supporting R&D (managers, supervisors, QA personnel).
Payroll for employees documenting, analyzing, or testing R&D projects.

Supplies & Materials

Cost of materials, parts, and components used in prototypes.
Non-depreciable supplies consumed during research and testing.

Contract Research & Third-Party Costs

Payments to third-party contractors conducting R&D work on your behalf (must be U.S.-based).
Outsourced testing, modeling, or design services used in development.

Cloud Computing & Software Costs

Cloud computing services used for research and testing.
Software development and data analytics tools tied to R&D.

Step 3: Maintain Proper Documentation

Good recordkeeping is key to a successful R&D tax credit claim. Create and keep these records for each project:

Project Descriptions – Outline project objectives, challenges, and technological innovations.
Time-Tracking Records – Document employee time spent on R&D activities.
Payroll Records – Match employee wages to R&D projects.
Expense Receipts & Invoices – Record materials, supplies, and contract research costs.
Prototypes & Test Results – Maintain evidence of testing and experimentation.
Meeting Notes & Emails – Show discussions about R&D developments and improvements.
Government or Grant Documentation – If applicable, include proof of R&D funding.

Tip: Implement a project tracking system before starting your R&D work to avoid last-minute scrambling!

Step 4: Calculate and Claim Your R&D Tax Credit

Identify all qualified research expenses (QREs) for the tax year.
Use IRS Form 6765 (Credit for Increasing Research Activities) to calculate the federal credit.
Check for state R&D credits – many states offer additional incentives.
Apply the Alternative Simplified Credit (ASC) method if you lack historical data for calculations.
If applicable, offset payroll taxes (for businesses with less than $5M in gross receipts).

Step 5: Avoid Common Pitfalls

Don’t claim ineligible activities (e.g., market research, reverse engineering, routine quality control).
Ensure documentation supports your claim – weak records can lead to disqualification.
Avoid overestimating expenses – inflated claims increase audit risk.
File before deadlines – Federal and state tax deadlines vary.

Important: Businesses can amend tax returns to claim R&D credits for the past three years if they previously missed out!

Step 6: Consult with an R&D Tax Credit Specialist

To maximize your credit and stay compliant:

Work with an experienced tax professional to review your eligibility and expenses.
Stay up to date on legislative changes affecting R&D tax credits.
Conduct an internal audit periodically to ensure continuous compliance.

Pro Tip: Many businesses underclaim their R&D credits due to uncertainty—an expert can help ensure you don’t leave money on the table!

Download This Checklist & Start Saving on Taxes Today!

Need help with your claim? Consult with an R&D tax credit specialist to ensure you maximize your benefits while staying audit-proof.