Conducting an R&D Study Series - Part 4: Technical Interviews with SMEs

Conducting technical interviews with Subject Matter Experts (SMEs) is a critical step in substantiating a company's R&D tax credit claim, following the initial setup of workpapers. This process allows for the collection of detailed qualitative and financial information necessary to determine and support Qualified Research Expenditures (QREs).

Here's a breakdown of the process:

• Prepping for the Technical Discussion Before the interview, it is beneficial to review relevant materials such as budgets, time-tracking data, or release notes to become familiar with the projects. This preparation helps to guide a more focused and productive discussion with the technical leads, also known as Subject Matter Experts (SMEs).

  
  

• Starting the Call: Understanding the Four-Part Test To ensure a common understanding of eligibility, begin the interview by spending 10 to 15 minutes walking through the IRS Four-Part Test. This helps SMEs grasp the rules for "qualified research," "qualified services," and "qualified research expenditures".

  
  

• Selecting a Representative Project (Deep Dive) Instead of detailing every project, select one that serves as a representative example. Spend 20 to 30 minutes discussing its key aspects:

  • The goal of the project (permitted purpose).

  • The technology used (must be technological in nature).

  • Technical challenges encountered during the year (evidence of uncertainty).

  • The development process undertaken to overcome those challenges (elimination of uncertainty). Record this information as contemporaneous documentation. Meticulous record-keeping, including project notes, is paramount to meeting the IRS's burden of proof and strengthening the credibility of the R&D claim.

    
    

• Overview of Other Projects Once the in-depth discussion of the representative project is complete, quickly review the remaining qualified projects, noting their goals and purposes sufficiently to substantiate their inclusion without a full technical breakdown.

  
  

• Identifying Participants and Applying Percentages Next, have the SME identify team members (employees or contractors) who worked on the qualified projects. Then, assign a qualified R&D percentage (typically between 0% and 90%) to each person based on the time they spent on eligible activities. It is a recommended practice that no individual employee should be at 100%; using 90% as a ceiling helps reflect time off and non-qualifying administrative work. For contractors, 100% is fine as there is a mandatory 35% haircut for non-qualifying activities included (see below).

  • For employees, "qualified services" that factor into qualified research expenses (QREs) include those who directly conduct, directly supervise (first-line management), or directly support qualified research. A special safe-harbor rule allows that if at least 80% of an employee's services during the tax year constitute "qualified services," then all (i.e. 100%) services performed by that employee during that year may be treated as "qualified services".

  • For contractors, eligible expenses are generally 65% of amounts paid to third parties for services that, if performed by an employee, would be "qualified services". For these expenses to qualify, contracts with third-party contractors must demonstrate that the company bears the economic risk (meaning payment is required even if the research is unsuccessful) and retains substantial rights to the research results (the right to use the discovered knowledge).

    
    

• Repeat the Process This entire process should be repeated with all relevant SMEs until every employee and contractor involved in R&D activities has been addressed.