What Is a Tax Credit Survey and How Does It Work?

A tax credit survey serves as a systematic approach for businesses to identify and substantiate eligible tax credits. These surveys are typically undertaken to maximize tax savings by ensuring a company claims all applicable credits. They involve a detailed review of a business’s operations, financial records, and other relevant documentation to uncover activities that qualify for various federal and state tax incentives. The ultimate goal is to reduce a company’s tax liability on a dollar-for-dollar basis, providing a direct reduction in taxes owed rather than merely a reduction in taxable income.

Defining a Tax Credit Survey

These surveys are often conducted by specialized tax consultants or dedicated internal finance teams with expertise in tax credit regulations. The survey aims to uncover qualified activities that align with specific tax credit programs. Common federal tax credits include the Research and Development (R&D) Tax Credit, which incentivizes technological innovation, and the Work Opportunity Tax Credit (WOTC), which encourages hiring individuals from certain disadvantaged groups. Other examples include energy credits for investments in energy-efficient property and equipment, or credits for establishing retirement plans.

Information for a Tax Credit Survey

Initiating a tax credit survey requires a business to compile detailed information and documentation. This preparatory phase is important for accurate identification and substantiation of potential credits. Financial records are foundational, including general ledgers, payroll registers, and invoices, as these documents provide evidence of expenditures.

For credits like the R&D Tax Credit, documentation must include payroll records for employees involved in research, receipts for supplies and equipment, and contracts with third-party partners. Detailed project descriptions outlining the nature, objectives, and progress of qualifying activities are also essential. Technical documents such as blueprints, designs, schematics, and test results further support the claim by demonstrating the experimental nature and technological advancements. For the Work Opportunity Tax Credit, information related to employee hiring, such as IRS Form 8850 and Department of Labor forms like ETA Form 9061 or 9062, is paramount. These forms confirm employee eligibility.

Organizational charts can illustrate reporting structures and personnel involvement in credit-generating activities. Contracts and agreements related to projects or services that might qualify for credits provide clarity on obligations and expenses. Details within these documents, such as job titles, time tracking data, and descriptions of work performed, are crucial for linking expenses directly to eligible activities and meeting IRS substantiation requirements.

The Survey Process

Once a company provides the necessary documentation, the tax credit survey proceeds with a methodical analysis by the survey team. This process involves a deep dive into the provided information to identify and quantify qualifying activities and expenditures. Data analysis is a significant part of this stage, where financial records are scrutinized to pinpoint expenses related to credit-eligible activities.

The survey team often conducts interviews with key personnel, such as engineers, project managers, and financial controllers, who possess intimate knowledge of the company’s operations. These interviews help gather qualitative information, clarify project details, and substantiate the nature of activities that may not be fully captured in written records. This qualitative data complements the quantitative financial information, providing a comprehensive picture of the credit-eligible work.

Project documentation, including technical specifications, progress reports, and experimental results, is thoroughly reviewed to confirm that activities meet specific tax credit criteria, such as the four-part test for the R&D Tax Credit. Tax law is then applied to these identified activities and expenditures to calculate the potential credit amount. This rigorous application ensures compliance with federal and state regulations, establishing a defensible claim should the credit be subject to examination by tax authorities.

Post-Survey Steps

After the tax credit survey is completed, findings are compiled into deliverables for the company. These typically include a detailed report outlining the identified credits, methodologies for calculation, and supporting documentation for each claimed credit. This report serves as a roadmap for claiming the credits and as evidence for substantiation.

Businesses then work with their tax preparers or accountants to claim the identified credits on their tax returns. For federal income tax, this often involves filing specific forms such as Form 6765 for the R&D Tax Credit or Form 5884 for the Work Opportunity Tax Credit, which are then attached to the primary business income tax return (e.g., Form 1120). If the survey identifies credits for prior tax years, companies may need to amend previously filed returns using Form 1040-X, typically within three years from the original filing deadline or two years from the date the tax was paid, whichever is later.

Maintaining proper records is a continuing requirement for potential audits. The IRS generally requires taxpayers to keep records that substantiate tax credit claims for at least three years after filing the return. These records should include all documentation used in the survey, ensuring that the company can defend its tax credit claims if questioned by tax authorities. This record-keeping helps mitigate risks associated with audits and preserves the financial benefits gained from the tax credit survey.