Keep records that link each business component to the four-part test and to the wages, supplies and contract research costs you claim. That one sentence is the whole of the documentation rule, and most claims that fail on examination fail because one of those links is missing. This page sets out what the IRS expects, what to keep as the year goes by, how to connect records to the numbers, and where the gaps usually are.
What the tax authority expects
The regulations do not prescribe a form of record. They require a taxpayer claiming the credit to retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible. In practice that means being able to answer, for each business component, the four questions of the test and, for each dollar of QRE, which component it belongs to and why.
For tax years beginning after 2025, Section G of Form 6765 asks for information about each business component, with some exceptions. The information requested includes the name of the business component, its type (product, process, software and so on), the information sought to be discovered, and the wages, supplies and contract research allocated to it. The exceptions cover qualified small businesses making the payroll tax election and taxpayers whose total QREs and gross receipts fall under thresholds. Section G turns what used to be an examination question into a filing requirement, which is why records organised by business component are now the only sensible way to keep them.
The Audit Techniques Guide the IRS gives its examiners sets out what they look for: contemporaneous documentation of the research process, a credible allocation of time, and consistency between the technical story and the financial records.
Records to keep during the year
| Record | What it shows | Who keeps it | When |
|---|---|---|---|
| Project charter or design brief | The business component, the objective, and the uncertainty at the outset | Engineering lead | Before the work starts |
| Design documents, hypotheses, test plans | Alternatives considered and the method of evaluating them | Engineers | As designed |
| Test results, build logs, lab notebooks, commit history | The process of experimentation as it happened, including failures | Engineers | As performed |
| Time records by project | Hours of qualified services per employee per business component | Everyone whose wages are claimed | Weekly or by sprint |
| Purchase records coded to projects | Supplies consumed and contract research paid, by component | Finance | At purchase |
| Contracts with researchers and customers | Who bears the risk and who keeps the rights | Legal or finance | Before the work starts |
| Location records for remote staff | That the work was performed in the United States | HR or project leads | As worked |
None of these records has to be created for the credit. A ticketing system, a version control history, a lab notebook and a timesheet produced for project management serve, provided they can be tied to a business component and a period. The academy's documentation guide gives a routine for the year; the principle is that a record made in March describing what was unknown is worth more than a memo written in December explaining what turned out to be hard.
Linking records to projects and costs
The linking is done with three identifiers. Every technical record carries a project or component name. Every timesheet entry and purchase carries the same name. And the claim workpapers map each name to a business component in Section G and to a line of QREs. The table below is the minimum workpaper for one component.
| Item | Content |
|---|---|
| Business component | Name, type, the information sought to be discovered, start and end dates |
| Four-part test | One sentence per part with a pointer to the record that evidences it |
| Wages | Employee, role, qualified services performed, hours or percentage, wages, source of the allocation |
| Supplies | Purchase, date, amount, how consumed in the research |
| Contract research | Contractor, agreement date, amount paid, 65% applied, risk and rights analysis, location of the work |
| Exclusions considered | Why the work is not post-production, adaptation, duplication, funded or foreign research |
Common gaps
- Estimates without a basis. Percentages of time assigned at year end by someone other than the employee. The Audit Techniques Guide directs examiners to test how time allocations were made and what records support them.
- Uncertainty reconstructed after the fact. A narrative that describes the finished product rather than the problem at the outset.
- No evidence of experimentation. Results without the alternatives, or a single design with no record of what else was tried.
- Executives in the wage base. Senior people whose time is claimed as direct supervision without evidence that they supervised the research personally.
- Contracts missing or silent on rights. Customer-funded work with no analysis of who bears the economic risk.
- Numbers that do not reconcile. QREs in the claim that cannot be traced to the payroll register and the general ledger.
Illustrative example
Keller Robotics, a hypothetical company, claims for a gripper control project. Its engineers log time to "GRIP-2" in the ticketing system; the design review from February records that no available approach held a 0.2 millimetre tolerance at the required speed; twelve test builds are tagged in version control with results; finance codes the sensor purchases to GRIP-2; the manager's calendar shows daily design reviews. On examination, the claim can be read from the records in an afternoon. The same project with only a year-end memo and a round percentage of engineering wages would take weeks to defend, and might not survive.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.