Speak with our experts

Schedule a free consultation with our team of experts!
Book a Call
R&D Tax Credit

Best Practices for R&D Tax Credit Documentation

R&D Tax Credit
Alliant Insights Mockup

Protecting the bottom line is essential for long-term success in the ever-evolving business landscape. One often overlooked avenue for achieving this is leveraging available tax credits and incentives. The Research and Development (R&D) Tax Credit is the most powerful permanent tax credit available to businesses today to invest in innovation, ultimately strengthening their competitive edge to the tune of five- and six-figure benefits.

However, claiming this credit can be complex and tedious without expert assistance. Businesses that invest in R&D and want to reduce their tax liability via the federal R&D tax credit must be able to show Qualified Research Activities (QRAs) and substantiate Qualified Research Expenses (QREs), but it’s not always easy to make sense of exactly what type of evidence and paperwork is needed. This article explores the key aspects of the credit, vital recordkeeping requirements, and examples of required R&D tax credit documentation requirements.

Understanding R&D Tax Credits

The R&D Tax Credit is a dollar-for-dollar credit for businesses investing in innovation and technology, designed to keep technical and manufacturing jobs in the U.S. In other words, this incentive directly reduces the tax liability of a business for designing, developing, or improving products, processes, formulas, inventions, techniques, or software. This credit is available at the federal level and in almost 40 states, making it one of the most lucrative business incentives available to U.S. taxpayers; however, R&D tax credit rules and guidelines are complicated and require the help of a specialist to fully understand.

Key R&D Tax Credit Requirements

Qualified Research Activities

To claim the R&D tax credit, a business must engage in “qualified research activities.” These activities typically include experiments, tests, and systematic investigation to develop new products, processes, or software. For example, developing new or improving existing software, developing or enhancing existing manufacturing processes, experimenting with new product prototypes, and more.

A research activity must meet the four-part test to be a QRA, and taxpayers must be able to document that an activity passes all the elements of the test:

1. Permitted Purpose
The business must show that the activity is intended to create new or improved business components to increase performance, functionality, reliability, and quality.
2. Elimination of Uncertainty
The business must show its intent to discover information that eliminates uncertainty concerning the capability, methodology, or appropriateness of the development or improvement in the business component.
3. Process of Experimentation
The business must demonstrate that it utilized a systematic process to evaluate one or more alternatives to achieve the desired results.
4. Technological in Nature
The business must show that the research activity must rely on physical or biological sciences, engineering, or computer science principles.
Schedule a Free Consultation

Qualified Research Expenditure

The QRE is a critical component of R&D tax credit calculations. QREs include employee wages, contract research expenses, supplies, and rental or lease costs of computers. Businesses need to keep in mind that the expenditure incurred should be directly tied to the specific research project.

1. Employee Wages:

The R&D tax credit covers employee wages for services directly involved in, supervising, or supporting research. This includes federal taxable wages reported on Form W-2, including bonuses and stock option redemptions.

Documentation for qualified employee expenses

  • Employee Forms W-2
  • Payroll registers
  • Timesheets
  • Oral testimony
  • Meeting minutes

2. Contract Research Expenses:

Contract research expenses refer to the applicable percentage, typically 65%, of amounts paid or incurred by the taxpayer to third parties (NOT taxpayer’s employees) for qualified research.

Documentation for qualified contractor expenses

  • Chart of accounts
  • General ledger
  • Service contracts
  • Purchase orders
  • Invoices
  • Forms 1099-NEC (for individual contractors)

3. Supplies:

The IRS defines qualified R&D supplies as any tangible personal property, excluding land, improvements to land, and depreciable property. To qualify as a QRE, a supply must be directly related to the performance of qualified services.

Documentation for qualified supply expenses

  • Chart of accounts
  • General ledger
  • Purchase orders
  • Invoices/Receipts
  • Bills of lading

4. Rental/Lease Costs of Computers:

Rental or lease expenses for computers or cloud computing can be considered QREs if they are directly associated with qualified research activities. This can include expenses for renting or leasing computers, laboratories or research facilities, and other equipment used directly in the R&D activity.

Documentation for qualified computer rental or lease expenses

  • Lease agreements or rental contracts
  • Logs & schedules documenting rental usage
  • Invoices/receipts

The above lists will give you an idea of what you might need to claim this credit but are by no means a definitive checklist. Required documentation may differ from one project to another. This is why you must consult a tax provider with expertise in R&D tax credit requirements in relation to your specific industry.

Get Documentation Support

R&D Tax Credit Documentation Best Practices

R&D tax credit best practices pertain not only to the documentation of costs, but also of activities. Though there is not one specific set of documents referenced in the Internal Revenue Code or related Treasury Regulations, the following overview provides a great starting point for pulling together claim information.

Firstly, before assigning any expenses to activities, taxpayers must show that qualified activities occurred. Typical documentation seen in major industries includes the following:

Manufacturing

  • Iterations of concept drawings, bills of material, or CAD designs
  • Reports, photos, or videos of prototypes, testing processes, and results
  • Notes or transcripts from meetings held to discuss concepts, design changes, or testing outcomes
  • Third-party safety or performance testing reports
  • Written or email correspondence related to meetings or project performance
  • Design approval forms

Architecture/Engineering

  • Initial concept design sketches
  • Photos of mockups, scale models, or prototypes
  • Meeting notes or transcripts
  • Design drawing iterations
  • Correspondence between internal and/or partner designers/engineers

Software/Technology

  • Concept/architecting meeting notes or transcripts
  • Software and/or hardware process flowcharts
  • Code iterations
  • Email or messenger correspondence with developers, testers, or managers
  • QA testing reports and bug lists

Life Sciences:

  • Written or email correspondence related to design requirements or changes
  • Product or formula test protocols or results
  • Third-party lab testing reports
  • Animal or human testing results and analysis
  • Management approval forms for formula or process design changes

Agriculture:

  • Planting, harvesting, or yield reports
  • Spec sheets for potential herbicides, pesticides, or other material inputs
  • Correspondence with chemical or material vendors related to product performance
  • Planting or seed yield maps

Project documentation should not only log your activities in the context of an R&D credit claim…it should also add value to your process. Thus, best practices for R&D tax credit documentation include the following:

Contemporaneously-generated:
Track your activities and results as they happen, not after the fact.

Tied to expenditures:
Activities should be tied to cost centers as granularly as is practical, drilling down to which specific employees, contractors, vendors, and material/component accounts were involved and to what degree.

Consistent:
Less-detailed information tracked day-in and day-out is more valuable than inconsistent data, which may give the impression that some R&D projects lack the same amount of activity as others.

Digital:
Computer- or app-generated documentation is more accessible, takes up less space, and can be easily duplicated or distributed.

Tailored to your business:
While a five-page report may describe the results of destructive testing, videos of testing and resulting outcomes may provide the same benefit with a fraction of the time commitment. Use what makes the most sense for you.

Retained for future use:
In the very least, documentation should be stored for reference during the three-year window after the filing of the tax return(s) for the claim period(s) in question; however, some state credits or special circumstances create longer look-back periods. Thus, R&D documentation should be stored for five to seven years as a best practice.

Understanding IRS Form 6765: The R&D Credit Form

Purpose of Form 6765:

Form 6765 is the official form for reporting an R&D tax credit claim on a federal tax return. It includes not only the calculation of the credit, but also the expenditures the credit is based on, as well as which business components they are tied to. Each member of a controlled group of companies must complete this form if they are reporting any qualifying research expenditures.

Sections of Form 6765:

Section A – Regular Credit Calculation

This section is for determining the “regular” version of the credit, which calculates the change between claim-year R&D expenditures compared to either the 80’s or 90’s fixed-base period.

Section B – Alternative Simplified Credit

As an alternative to the fixed-base calculation methodology, the simplified credit looks at the three years immediately preceding the claim year to determine the increase in R&D expenditures.

Section C – Current Year Credit

This section ensures that no double-dipping occurs between the Section 41 R&D credit and the Credit for Employer Differential Wage Payments. It then helps claimants determine where to further report the R&D credit, depending on their entity type.

Section D – Qualified Small Business Payroll Tax Election and Payroll Tax Credit

This part of the form is for small businesses meeting the requirements to claim the reduced credit that offsets payroll tax.

Section E – Other Information

Section E of the Form 6765 provides contextual information about the credit claim, which includes how much in officer wages was claimed in the calculation, as well as changes from prior year claims. This section also asks about how R&D expenses are treated on the taxpayer’s financial statements.

Section F – Qualified Research Expenses Summary

This section breaks down the total QRE figure utilized in the credit calculation into its constituent parts: wages, supplies, contactor costs, computer rental/lease costs, and basic research payments.

Section G – Business Component Information

Section G comprises the heart of the new reporting requirements for Section 41 R&D Credit claims. Within it, taxpayers must list out the business components for which they are claiming this incentive. The overall goal is to ensure that reported costs are tied directly to the projects they’re related to, as well as the specific activities undertaken to overcome technical uncertainty.

Estimate Your Credit Now

Recent Changes to Form 6765 (2025 Updates)

How to Claim the R&D Tax Credit

Businesses benefiting from R&D tax credits must file Form 6765 (Credit for Increasing Research Activities) as part of their income tax return. This form is where you report the details of your qualified research activities and expenditures, and it plays a pivotal role in the credit application process. Completing Form 6765 accurately is vital, as errors or omissions can lead to delays or disqualification.

Recent changes to Form 6765 require many filers to provide the following information:

  • For the top 50 business components comprising at least 80% of total QRE, identify all research activities performed and name the individuals who performed each research activity and the information each individual sought to discover.
  • Data for the remaining business components is reported via an “Aggregate Business Component” line item
  • If a statistical sampling methodology was employed, the taxpayer must delineate the sampled projects. Moreover, a copy of the statistical sampling plan must be attached.

This information, found in the newly-created Section G of the form, applies to any business with gross receipts over $50MM or QRE over $1.5MM, except for Qualified Small Businesses, which do not need to supply this information. For businesses meeting these requirements, it is optional for tax years beginning before 2025, but mandatory for any tax year beginning in 2025.

As the R&D tax credit incentivizes increasing R&D activity, taxpayers calculating this credit must compare current-year expenditures to those of a base period. This increase is what ultimately generates a credit. Depending on when the taxpayer’s prior-year R&D activities occurred, their base period can consist of several years in the 1980’s, the 1990’s, or the three years immediately preceding the year being claimed for. In any case, QREs must be established for those years, just as they are for the claim year.

Typically overlooked activities:

  • Direct supervision of R&D by managers or officers
  • Direct support of R&D by production workers or technicians
  • Initial concept development/ideation
  • Incremental process improvements
  • Design improvements new to the taxpayer, not to the world

Commonly mis-claimed expenses:

  • Plant or lab utilities and overhead
  • Wages of administrative staff not involved in the process of experimentation
  • Expenses related to development of non-technical aspects such as consumer preference or marketing strategy
  • Any expenses related to projects where the taxpayer did not retain substantial rights to the research or did not bear economic risk during the R&D efforts

How alliantgroup Can Help You Maximize Your R&D Tax Credit

R&D tax credits present a compelling opportunity for businesses to invest in innovation and enhance competitiveness. However, claiming these credits requires a thorough understanding of qualified research activities and qualified research expenditures.

At alliant, with our two decades of experience in tax credits and incentives, technology, and a team of former IRS commissioners, policymakers, and 800+ industry-specific experts, we’re well-equipped to assist businesses with R&D tax credit documentation, calculations, and reporting. We are at the forefront of changes in regulations impacting tax credits, which gives us deeper insight into industry-specific activities that may qualify a business for this credit.

Contact us to discuss R&D tax credits for your business, or reach us today at 844.524.0077.

News & Insights

View insights hub
News & Events Press Release

The SETI Institute announced that alliant Global CEO, Dhaval Jadav, joined its Board of Directors. Dhaval brings a deep lifelong passion for space science, a strong commitment to STEM education, and a shared belief in the SETI Institute’s mission to explore one of humanity’s most profound questions: Are we alone in the universe?

Speak with our experts

Schedule a free consultation with our team of experts!