DST Methodology:
Over the course of 10 years, with a pandemic spanning 2 of those years, there was a high degree of turnover of employees at the taxpayer’s locations. Identifying key personnel who were able to recall specific projects was a challenge. Record-keeping was another obstacle to overcome due to the taxpayer’s document retention policies and general server and laptop upgrades.
However, DST’s Tax Engineers quickly got to work and were able to help fill in the technical and engineering gaps.
DST Tax Engineers reviewed the claims (F6765s) and related work papers and matched the cost centers and expense accounts to the calculation. The goal was to get an understanding of the structure of the claimed QREs, and the current way the company was structured. DST was committed to understanding what cost centers, departments or divisions were still around, which ones were renamed or reorganized if there were any dispositions in that time period, and if there were major changes in personnel or reporting organizational structure. All of this would help DST uncover the targeted individuals to assist with building the narrative and collecting documents or records from that time period.
DST evaluated the base period calculation, ensuring that the correct methodology was selected given the information available (i.e., regular credit or ASC) and if there were any acquisitions in those base period years that also had to be accounted for. It’s important to note that the base period years also have to be substantiated both from a financial aspect and from a technical aspect. DST also looked to identify any employees who were still employed from these years, or anyone who could assist with gathering project lists and engineering documentation to support these qualifying activities during these years. A robust and comprehensive base period memo that memorializes the QRAs and QREs during this time period, along with the methodology used, is always prepared to capture as much information as possible.
Finally, DST proceeded with technical interviews and documentation gathering for the claim years and aligning the records with the QREs used to calculate the credits on the F6765s. This included:
- drafting narratives to describe the processes that were in place in the claim years for the development of the business components,
- describing how the statutory 4-part test was met for the qualified research activities identified, and
- memorializing the record-keeping practices followed by the divisions.
Throughout this process, DST was able to help the taxpayer not only provide training and education to the taxpayer’s engineering and qualified operations teams, but DST was also able to integrate best practices and processes to ensure that record-keeping and documentation are kept in real time. This helps with better tracking and compliance, and will ultimately lead to increased identification of qualified research activities and corresponding qualified research expenses.
