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How do the best tech companies track engineers' time to allocate salaries for the US R&D tax credit? Do they require their engineers to enter their hours every week or do they use some other method?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

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R&D Tax Credit

When it comes to tracking engineers’ time to substantiate the US R&D tax credit, your safest bet is to use a time tracking app on a daily basis. We love Harvest for this purpose. You can always use paper timesheets, excel sheets, or email records. Time tracking because increasingly important for later stage startups and those startups that are generating revenue or have already brought a product/service to market. This is because the line between improving a current product/service and developing new technologies becomes increasingly blurred. Remember, you can only claim the R&D credit if you’re developing something new.

Click here for more information on How to calculate a Startup R&D Tax Credit, or visit our Startup R&D Tax Credit Calculator.

How much will my startup really save by implementing the startup R&D tax credit payroll offset?

~10% of eligible R&D costs, up to $250,000 per year, for 5 years.

Watch out for companies that claim to be able to use AI or an automated system to track your engineers efforts. The IRS doesn’t care if a piece of software estimates something that goes into your Form 6765… if you get audited, which happens because these credits TAKE money from the US Treasury, then it’s the CEO who will be grilled about how the calculations were done. So work with an experienced CPA who knows tax credits in and out and who has survived multiple IRS audits. 

Caveat: this article is intended as general guidance for startups and it doesn’t substitute the need to work with a professional. It’s also a high level overview and is in no way complete. Your company is unique; talk to your CPA.

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