Reconciling R&D tax credit expenses to the general ledger is an important part of supporting a credit claim. This page explains how to reconcile expenses to the general ledger. It is educational and is not individualized advice. For the general documentation concepts, see our page on R&D tax credit documentation.
Why Reconciliation Matters
Reconciliation helps support the accuracy of the qualified research expenses claimed by connecting them to the underlying accounting records. The IRS has noted that studies which fail to connect specific projects and activities to the underlying costs can fail to establish the required nexus. Reconciliation helps establish that connection.
What to Reconcile
The main categories of qualified research expenses to reconcile are:
- Wages — reconciling wage QREs to payroll and general ledger records.
- Supplies — reconciling supply QREs to purchase and general ledger records.
- Contract research — reconciling contract research QREs to vendor and general ledger records.
For more on each category, see our pages on payroll reconciliation, supplies reconciliation, and contractor reconciliation.
How to Reconcile
A useful reconciliation approach involves:
- Identify the QRE total — the total qualified research expenses for each category.
- Identify the GL total — the total expenses in the general ledger for the related accounts.
- Connect QREs to GL — connect the qualified research expenses to the specific general ledger entries.
- Document the connection — document how the QREs were derived from the general ledger.
- Address differences — explain any differences between the QRE total and the GL total (e.g., allocations, excluded costs).
Hypothetical Example
Consider a manufacturer that has total wage QREs of $500,000. The company reconciles this to its general ledger by showing which payroll accounts the QREs were derived from, how the wages were allocated to qualified research, and how the $500,000 connects to the general ledger. This reconciliation helps support the accuracy and nexus of the wage QREs.
This example is illustrative only.
Key Takeaway
Reconciling R&D tax credit expenses to the general ledger involves connecting qualified research expenses to the underlying accounting records. This helps support the accuracy and nexus of the claimed expenses. Because reconciliation is fact-specific, professional review is appropriate.