THIS CASE STUDY SHOWS THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR QUALIFYING R&D ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE SOFTWARE INDUSTRY.
BUSINESS SCENARIO
IVO Tech (IVO) is a leading software company specializing in employment screening software. The company was founded to provide new and innovative technologies to employment screening firms to help them improve productivity, reduce overhead, and have technological competitive advantages over otherwise similar firms.
IVO incurred qualified research expenses relating to the development of numerous innovative features in 2015-2017. IVO had never claimed the R&D tax incentive before and was unaware it was performing qualified activities. After meeting with a specialist and learning more about R&D, IVO realized it was eligible for the credit.
IVO TECH’S ELIGIBLE R&D ACTIVITIES
The R&D tax incentive specialist helped IVO determine its qualifying R&D activities, many of which were part of the company’s daily operations. IVO’s qualified research expenses (QRE) included:
- Development of new or improved software features to meet changing consumer preferences;
- Improvement to processing speeds
- Improvements for storage
- Testing across all supported releases to determine exposure
- Experimentation with possible fixes until an adequate solution was determined
- Creating and executing test cases to eliminate uncertainty prior to releasing software to customers
After adding up labor and supplies costs from 2015-2017, IVO claimed the federal R&D Tax Credit and received a tax credit. After realizing the benefits, a sustainable methodology was also established to help IVO identify, document and substantiate eligible R&D projects and costs on an ongoing basis.
WHAT RECORDS AND SPECIFIC DOCUMENTATION DID IVO TECH KEEP?
Similar to any tax credit or deduction, IVO had to save business records that outlined what it did in its R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. IVO saved the following documentation as evidence:
- Innovation Log
- Records of changes and bug fixes
- Photographs/ videos of testing
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Receipts
- Labor time sheets
By having these records on file, IVO confirmed that it was ‘compliance ready’ — meaning if it was audited by Revenue, it could present documentation that illustrated the progression of its R&D activity, therefore proving its R&D eligibility.
