In addition to all financial documentation related to the calculation of the R&D credit, it's important to retain documentation illustrating the nexus between qualifying activities and QRE. There is no specific documentation requirement mentioned in the 1.41 regulations, they simply state that a taxpayer claiming research tax credits must retain records in a sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.
Examples of contemporaneous documentation include:
- Internal status reports
- Technical emails
- Minutes, notes, or other similar recordings from budget, board of directors, managerial or other similar meetings concerning research activities.
- Lab notebooks
- Patent applications
- Product specifications
- Test result reports
- Project timelines
- Diagrams & drawings
- Engineering reports
When identifying the most appropriate contemporaneous documentation to support the R&D credit, use the main qualifying expenses as a guide. In other words, if the credit was mainly driven by a handful of highly qualifying employees, you would want to gather ample documentation establishing nexus between the qualifying activities performed by those employees and their associated wage expenses. If the main driver of the credit is contract research expenses, then documentation around the activities of those contractors and the associated expenses should be identified and retained.