Research and Development (R&D) is an extremely important function for businesses, governmental institutes, scientific laboratories, and other organizations. It is an engine that drives progress and innovation in virtually every sphere. Companies around the world spend hundreds of billions of dollars annually on R&D to create new products, solutions, technologies, and drug therapies. Sometimes, companies hit the jackpot with innovations that change the world, though sometimes all of the expenditure and effort amounts to little.
To encourage companies and other organizations to boost their R&D efforts, most countries offer incentives such as tax credits, grants, and concessions to companies and institutions that can document their research-based activities. In the United States, for instance, companies are incentivized by the R&D Tax Credit under Section 41 of the Internal Revenue Code, which we covered in this earlier article, and many countries have similar provisions in their taxation regimes. To get these tax breaks, research centers must methodically track and document their expenditures, not only in work-hours, but also in infrastructure, materials, IT, and salaries paid.
Recently, an Australian firm that develops beverage purification devices lost a dispute with the Australian Commission of Taxation and was denied the R&D tax credits that it had applied for. The firm was unable to back up its claims of having research expenditures under the purview of the taxation rules. Specifically, the company had not instituted record-keeping systems to capture time spent by their researchers on R&D activities. Moreover, their R&D related purchases could not be distinguished from their regular business purchases and, unfortunately, the company had not provided documentation that could “be understood by an independent expert.”
Look at this article which talks about how time tracking technology can aid organizations in their quest to document R&D spends.
While hindsight is often 20/20, it’s clear that the firm in question should have used a rigorous system to track and document all their R&D spending. A solution such as Replicon’s PPM Solution would have allowed them to easily segregate and track spending on R&D related projects, and thoroughly document expenses that could have been considered for tax credit claims. With the comprehensive reporting features of such a solution, companies applying for tax credits can easily provide auditors with solid, indisputable data to back up their claims and receive the credits they’re entitled to.
Next post – The $$ Difference between Running Time Tracking Software On-premise versus in the Cloud.