Tracking corporate research and development (R&D) expenses is crucial to ensure they are eligible for SR&ED tax credits. Any R&D project involves expenses for various purposes. It includes labour, materials, equipment, overhead, etc. On top of supporting a robust SR&ED application, tracking these expenses can help manage cash flow, spend responsibly, and determine how profitable your business is. As a business owner, you may find it challenging to track your R&D expenses and determine which ones to include in the SR&ED claim and which ones to exclude. In this regard, you can consult experienced and professional SR&ED consultants who can help you with tracking your R&D expenses and determine which expenses should be submitted and which ones should not be an SR&ED claim. In this way, you can maximize your SR&ED tax credits while minimizing CRA audit risk.
4 Benefits of Tracking R&D expenses
The following are the benefits of tracking R&D expenses for your business. Let’s discuss them further.
SR&ED tax credits
When applying for the SR&ED tax credits, you must identify eligible expenditures. By tracking all your business expenses, you have to submit proof of these expenses in case your claim is selected for a CRA audit. Failure to do so will result in claim denial and could get you blacklisted with the CRA.
Manage your cash flow
Cash flow refers to the amount of money that moves in and out of your business over a period of time. R&D projects involve large expenses. As a result, a lack of cash flow can not only prevent the R&D project from continuing but also can cause your business to fail. Hence, businesses need to manage their cash flow to ensure their R&D project continue smoothly and ensure their growth. In this regard, businesses can track their daily expenses to ensure how much money they are spending every month. Additionally, comparing expenses to income can also help identify shortfalls. Based on the result, businesses can find ways to maintain a balance between income and expenditures. Working with a professional book keeper is strongly encouraged and it will streamline the SR&ED claim preparation process and will reduce risk of an audit.
Spend within budget
Tracking R&D expenses can also help businesses control their expenses. They can determine the total amount of expenditures and identify the areas on which they are spending. It can further help you determine whether you are well within your budget or have crossed it. The purpose is to stay financially aware of your business.
Determine your business profitability
Businesses are well aware of the ways to calculate profitability, which is deducting expenses from the total revenue earned. Tracking your R&D expenses can help you understand better whether your business is earning profit or not, without having to wait until the tax yea end financial statements. By monitoring profit/loss on a monthly basis will further help you make better business decisions to carry out your R&D work and grow your business.
How can you calculate the value of your SR&ED claim?
Tracking your R&D expenses can help you understand which of them are eligible for SR&ED claims. By submitting financial records to your SR&ED advisors, is the first step in getting your tax credits. Let’s discuss the steps to calculate the value of your SR&ED claim.
Determine eligible SR&ED projects
Only some types of R&D projects qualify for tax credits. Hence, your SR&ED advisor needs to identify eligible projects to prepare your SR&ED claim accordingly. Projects that help advance scientific knowledge could typically be eligible for SR&ED tax credits. Additionally, projects that address technical uncertainties that existing methodologies cannot resolve can also qualify for an SR&ED claim. Keeping these aspects in mind, you need to keep track of your projects following your SR&ED advisor’s guidelines. Proper documentation involves detailed records of project objectives, methodologies, financial records, contractor agreements, experiments, iterations and failures, and results. It will help strengthen your claim. Proper time tracking for your technical team is also crucial.
Identify eligible R&D activities
R&D activities involved in basic research, applied research, and experimental development are eligible for the SR&ED tax credit. You should document all your R&D activities properly to support your claim.
Identify eligible expenditure
The first step to calculate the value of your SR&ED claim is to identify eligible expenditures. It includes
- Salary or wages
- Materials
- Subcontractor expenses
- Overhead expenses
By tracking and maintaining accurate and thorough documentation, you can prove these expenses in your claim.
Calculate labor expenses
One of the crucial aspects of SR&ED claims is calculating labour expenses. The reason is simply because these expenses typically make up the majority of the total claim amount. In this regard, businesses need to track and maintain a detailed record of the following –
- Detailed time logs mentioning hours employees spent on different SR&ED-related works
- Time allocation between SR&ED and non-SR&ED activities
- Details of individual employees’ job roles for the project
- Payroll records
Thorough financial records help strengthen your claim’s credibility and maximize SR&ED returns.
Calculate expenses of materials and equipment
Expenses of materials, equipment, supplies, etc., involved in your R&D project can also qualify for SR&ED claims. As a result, businesses need to track and maintain detailed records of invoices/receipts of materials used in the project to prove their claim.
Contract for SR&ED work
You can also claim the amount you have paid or are payable to contractors or sub-contractors involved in your R&D project. In this regard, you need to keep track and maintain a record of agreements with contractors or subcontractors to substantiate your claim.
Calculate overhead and other expenses
Overhead expenses include utilities, property taxes, rent, etc., and can be included in your SR&ED claim, provided they are directly related to your SR&ED projects. You should track and maintain a detailed record of your R&D-related overhead expenses to support your claim. Your SR&ED advisors should provide specific guidelines regarding the ways to allocate these expenses. Following these guidelines can help improve the credibility of your claim.
Determine the total SR&ED claim amount
Based on the SR&ED eligible expenditures, you can calculate the total claim amount. You can choose either the traditional or proxy method to calculate your expenditure for the tax year that you are claiming. In this regard, remember that you cannot change the calculation method after you have submitted your claim. In the traditional method, you need to identify overhead costs in your calculation of allowable expenditures. On the other hand, in the proxy method, you do not need to calculate overhead expenses. Instead, you need to calculate a substitute or proxy amount that is not deductible but will help earn an investment tax credit.
Poor documentation increases the risk of your claim being denied or rejected. Hence, you need to track your R&D expenses to avoid possible rejection of your claim. Maintaining detailed records of all your expenses from the beginning can help you prepare your claim effectively. You can consult SR&ED advisors in Calgary and seek guidance regarding the ways to keep track of these expenses and submit them with your claim in an organized way.
