When developing an RTC Study, there are 5 best practices to consider when integrating surveys.
Picture this: A small tax team at a large company was under immense pressure to meet their deadlines. To gather information, they sent out internal questionnaires to their employees. However, the team was struggling to review the sheer volume of information they had received within the given timeframe. Additionally, they were unsure if the data they had received was accurate, but they assumed it was.
The team worked tirelessly, trying to review the information they had received, but they were unable to do it as quickly as they wanted. As the days went by, the tax team became increasingly concerned about the accuracy of the data, and they were also worried that they had not received questionnaires back from 25% of the employees. Although the team was doing their best, the workload was overwhelming, and they were struggling to keep up.
Despite their frustrations, the team was determined to meet their deadlines. They knew they needed to find ways to streamline their work and improve their processes to prevent similar issues in the future. They also needed to ensure that the data they received was accurate and that they received responses from all employees to make informed decisions.
It was a challenging time for the tax team, but they were committed to completing their work on time and to the best of their ability. They knew that their efforts would not only benefit the company but would also have a significant impact on their reputation as a reliable and efficient team.
This predicament happens often, and the Research Tax Credit (RTC) study is no exception. The RTC study is one of many projects where companies either hire outside firms that specialize in this complicated aspect of the tax code, or work with an inherited questionnaire and/or survey system that has appeared to work sufficiently in the past.
With the increasing complexity of tax returns and increasing demands on all parts of organizations, pressing deadlines can result in frustration, stress, and past solutions no longer being a good fit. Even if a tax department decides to run the project in-house, they still may encounter roadblocks and resistance internally, which is both frustrating and challenging.
So, what can be done?
The simplest answer is to have everyone who is working on any qualified project complete a template or time sheet, such as a questionnaire or survey, and send it back to the tax team.
Sounds simple, right?
Not quite. Many companies use questionnaires to collect information for the RTC study. Typically, these questionnaires have been used for many years with little inquiry as to the accuracy or relevancy of the information provided. Typically issued by the Tax Department, these questionnaires make their way to individuals who may or may not be aware of their intent. They fill in the questionnaires to the best of their ability, and then submit them back to the Tax Department, where the task of deciphering the data begins.
The question then arises: is the questionnaire process accurate and thorough? When new engineers are hired or asked to complete the questionnaire, who is telling them what to complete? Do they know what the survey is being used for? Can the tax team trust the quality of the information on these surveys without having the technical and/or engineering knowledge themselves to determine if the information meets the qualification under Section 41, specifically the 4-part test?
In our experience, a taxpayer’s engineering or operations teams aren’t aware of the requirements for the RTC. After all, why would they? This information is typically outside the scope of what they were hired to do. The RTC is a corporate tax-driven project in which the technical team were asked to participate.
Furthermore, there are misconceptions about what people often believe “research and development” is. This is precisely why it’s important that these selected subject matter experts (SMEs) have a firm understanding of the objectives of the RTC project, the definition of what a qualified research activity is, what activities are not qualified (i.e. specific exclusions), and the ability to coordinate documentation to support the overall claim.
There are a number of proven best practices that can be easily put in place to immediately help with the RTC study. Simply thrusting templates is not the right solution, and each taxpayer’s facts and business must be looked at uniquely. The best solution is to utilize the existing record-keeping process as much as possible as the outline from a documentation and nexus aspect and then look for ways to integrate the 4-part test qualification into it. This process requires experienced Tax Engineers specialized in both Section 41 and the engineering or scientific method of experimentation.
RTC Study Best Practices
1. Prepare annual tutorials for orientation and training: As a refresher and as an orientation for newcomers, it’s a good idea to have a strong training presentation annually. The best possible method is to get people in person (or in a virtual meeting) and explain what the R&D credit is, what types of activities qualify, and why it is important to the organization. This training helps open the floor to questions. Then the following year, people will start to understand the qualifications and be able to provide more information. The key here is to allow for Q&A. Distributing a recorded video is also a good alternative, but be sure to follow up with a personal email to the newcomers to make sure they understand the assignment being asked of them.
2. Routinely update and revise your existing questionnaires or surveys: To increase the efficiency of the survey, it is important to improve the survey each year and see how you can alter it to gather more pertinent information.
- Ensure accuracy: Taxpayers need to ensure that the information on the questionnaires or surveys accurately reflects the research activities and expenses that are eligible for the Research Tax Credit. Reviewing and revising the questions and instructions can help ensure that the information collected is complete, accurate, and relevant.
- Keep up with changes: Tax laws and regulations can change frequently, and taxpayers need to stay up-to-date on these changes to ensure that they are properly claiming the Research Tax Credit. Regularly reviewing and updating the questionnaires can help taxpayers keep up with changes to tax laws and regulations.
- Improve efficiency: Questionnaires or surveys that are poorly designed or outdated can be time-consuming and frustrating for employees to complete. By reviewing and revising the questionnaires regularly, taxpayers can improve the efficiency of the data collection process, reduce errors, and ensure that the information is collected in a timely manner.
- Differentiate by department or business unit: The questionnaire should differ between different departments or divisions, based on what they are specifically doing. Try to use terms, document tracking, or project names they are working on (i.e. the dedicated R&D departments versus those involved in the continuous improvement projects).
3. Memorialize in Real-time: Sending out frequent surveys and maintaining real-time documentation will help improve the accuracy and efficiency of the RTC study. The frequency of surveys for the purposes of the RTC can depend on several factors, such as the size of the company, the complexity of the research activities, and the frequency of the research activities.
- Frequency of Surveys: If a company engages in research activities on a regular basis, such as ongoing product development, it may be beneficial to send out the surveys or questionnaires more frequently, such as quarterly or semi-annually, to collect data on a more regular basis. On the other hand, if a company only engages in research activities occasionally, it may only be necessary to send out the surveys or questionnaires on an as-needed basis. Ultimately, the frequency of sending out or completing surveys or questionnaires should be determined based on the needs of the company and the nature of its research activities.
- Real-time Documentation: Documentation, however, is a critical component of an RTC study. By gathering the documentation in real-time, SMEs will have an easier time providing those documents when the study starts the following year.
4. Conduct Self-audits or Reasonableness checks on Data Coming Back: Sometimes even when good questionnaires are sent out, the data can still be skewed. When the data comes back, check it. Make sure it makes sense when comparing it to the previous year, your knowledge of the business unit, the projects taking place, etc.
5. Integrate Qualified Projects into the Tracking System: If a taxpayer is using a tracking system already, it is always a good idea to see if the client can flag certain projects to identify them as qualified. This will help make the allocating time more efficient and accurate.
DST Advisory Group and Our Tax Engineers
If you are struggling to instill these best practices, our team of Tax Engineers are here to help. The Tax Engineers at DST Advisory Group have industry experience that allows them to communicate with your company’s subject matter experts to conduct an efficient and accurate study. Get in touch with us to get started.