Claiming a $20,000 R&D credit with audit-ready documentation

A Wichita, Kansas software company that develops and licenses commercial software engaged us to prepare a complete R&D tax credit study, supporting documentation, and audit-ready workpapers for tax year 2025.

The credit was claimed on the client's timely filed original federal and state returns through their own CPA. We did not sign or file any tax returns. Section 7216 consent was obtained before any tax return information was shared with us.

The client had developed and licensed commercial software but had never claimed an R&D tax credit. They believed their development activities qualified, yet the estimated benefit, approximately $20,000 was too small for many specialty R&D tax credit firms to pursue.

There was also a technical question that needed to be resolved before any credit could be calculated. Because the client developed software, they believed their work might be treated as internal-use software, which is subject to a significantly higher qualification standard. If that assumption had been correct, much of the work would have faced an additional three-part innovation test.

The engagement therefore required more than simply calculating a credit. We first needed to determine the correct tax treatment of the client's software, then prepare documentation that would allow their CPA to confidently support the claim on an original return.

Resolved the technical question first

We began by resolving the client's biggest technical concern. Before calculating the credit, we evaluated whether their software qualified as internal-use software under the regulations. Because the software was developed for commercial sale and licensing to third parties, it fell outside the internal-use definition and did not need to satisfy the additional innovation test. We documented that conclusion with supporting regulatory references rather than relying on assumptions, knowing it would be one of the first questions raised during an examination.

Documented three business components

We then identified and documented three qualifying business components, describing for each the intended technological improvement, the technical uncertainties encountered, the alternatives considered, and the process used to resolve them. Where only part of a project qualified, we applied the shrinking-back rule to claim only the eligible portion.

Built the audit-ready file

Finally, we prepared an audit-ready documentation file that reconciled every qualified research expense to payroll and accounting records, supported wage allocations, reviewed funded research considerations, and addressed each applicable statutory exclusion. Although Section G of Form 6765 was not required for this return, we organized the file using its framework to simplify future filings and maintain a consistent documentation standard.

The engagement resulted in approximately $20,000 in combined federal and state R&D tax credits claimed on an original return through the client's independent CPA. Beyond the current-year benefit, the engagement established a documented methodology for identifying qualifying activities, allocating qualified research expenses, and maintaining audit-ready records.