Proper documentation is the foundation of a successful tax credit claim. Without adequate records, even legitimate credits can be disallowed by the IRS. This guide outlines what documentation you need and how to maintain it properly.
Why Documentation Matters
When claiming tax credits, you must be able to prove that you meet all eligibility requirements. The IRS can audit credit claims, and without proper documentation, you may lose the credits and face penalties.
Essential Documents
Time Records
For credits based on employee time (such as R&D credits or WOTC), you need detailed time tracking showing:
- Which employees worked on qualifying activities
- How much time they spent
- What specific projects or activities they worked on
Project Documentation
Maintain records of qualifying projects including:
- Project plans and objectives
- Technical challenges addressed
- Experimentation processes and results
- Meeting notes and technical discussions
Financial Records
Keep detailed financial documentation:
- Payroll records for qualifying employees
- Receipts for supplies and materials
- Contracts and invoices for contract research
- Equipment purchase records
Best Practices
To ensure your documentation stands up to scrutiny:
- Document activities as they happen, not retroactively
- Be specific and detailed in your descriptions
- Maintain consistent record-keeping practices
- Store documents in an organized, accessible system
- Retain records for at least seven years
Preparing for an Audit
If the IRS audits your tax credit claims, you'll need to provide:
- All supporting documentation
- Explanations of how activities qualify
- Calculations showing how credits were computed
- Evidence of compliance with all requirements
Getting Professional Help
Proper documentation requires understanding both what to document and how. Working with a tax professional who specializes in credits can help you establish effective documentation processes from the start.