7 R&D Expenses to Track to Avoid Month-End Surprises

R&D expenses are usually part of the process of finding, creating or developing a new product or service. They include the original development and design, as well as any improvements made over time. To put it another way, they relate to activities that contribute to the creation of intellectual property.

It’s important to note that R&D expenses are tax-deductible. Tracking them will help you prepare for month-end close and maximize your savings. Here are seven types of R&D expenses that you should be aware of.

1. Labor Costs & Salaries

Salaries and labor costs make up the most significant portion of all R&D expenses. But they’re only considered R&D expenses if the people in question are performing qualified services.

Qualified services include relevant research, direct supervision, and direct support. For example, the salaries of scientists, engineers, and technical developers count as R&D expenses. Note that general or administrative support functions don’t qualify, even if they’re part of a research department.

Tracking this expense category is essential to ensuring compliance. You’ll need to carefully review job duties and projects—not only to determine which ones qualify as R&D, but also to identify what percentage of people’s time is spent on relevant functions. Failure to properly track labor costs can lead to substantial tax liabilities.

2. Cloud Infrastructure Costs

Cloud infrastructure costs are critical to R&D, but only certain uses qualify. They have to be dedicated to R&D and technical in nature. They also need to provide experimentation that eliminates a technical level of uncertainty.

Cloud computing provides a wide range of services. You should retain all records and invoices to meet record-keeping requirements and increase the efficiency of calculations. Only expenses dedicated to testing and development, pre-production or prototype development should be counted as R&D expenses.

3. Expenditure on Computer Software & Tools

This R&D expense category can include software and tools that are purchased or used internally. Only the portion attributable to R&D should be considered. Expense management software can make this easier by automatically identifying relevant tools.

Any given software may be used by multiple departments or projects. Monitor who uses each tool and allocate your R&D expenses accordingly. Proper analysis takes time, so it’s essential to track these expenses either in advance or as they occur.

4. Subscriptions to Databases, Libraries & Societies

Common subscriptions include memberships to technical, business, and professional organizations and associated periodicals. To be eligible, they must directly support R&D.

Subscriptions are billed at different intervals (e.g., annually or monthly). Proper tracking can help you identify double-billing and make sure all subscriptions are approved. A subscription may be an eligible company expense in general, but not a qualifying R&D expense.

5. Costs Incurred for Licensing of Intellectual Property

As R&D progresses, costs related to the licensing of intellectual property may arise. These include patents and copyrights, which are integral to protecting intellectual property and investments. These costs go beyond the application fees for licenses and might also include legal fees.

Because licensing is a long process with multiple vendors involved, proper tracking allows you to compare actual costs to your budget and address discrepancies. Invoices may include charges for multiple projects, but only relevant line items should be allocated to R&D. Real-time tracking allows your business to stay agile as costs and timelines evolve.

6. Overhead Costs

Overhead costs encompass a wide variety of expenses, including general and administrative functions that benefit R&D. These might include utilities, rental costs, administrative salaries and more. Overhead costs should only be billed to the extent that R&D directly benefits from them.

Before coding overhead costs as R&D, determine what percentage of each expense is allocable. For example, utilities that apply to the entire organization shouldn’t be billed only to R&D. Failure to identify and track R&D’s fair share of overhead costs can lead to material misstatements of the company’s financial position.

7. Non-Capital Purchases

Non-capital purchases are a category of R&D expenses that are both directly related to research and used by staff performing qualified services. They’re broken down into the following subcategories:

Materials & Supplies

• Raw materials
• 3D printer filament
• Prototypes

Equipment & Machinery

• Disposable laboratory equipment
• Electrical components
• Data processing equipment
• Hardware

Services

• Research contract expenses
• Outsourced analysis
• Lab testing

Tracking these expenses requires a clear understanding of what’s eligible and why. The smallest expenses are often the most frequent, and properly classifying them will lower the burden of compliance.

Make the Most of Your R&D Spend

One important thing to note about R&D expenses is that they’re highly volatile from year to year in comparison to normal operating costs, so they can be difficult to manage and predict. Using an expense management solution is the best way to streamline your R&D spend tracking and keep a detailed, accurate record of all related expenses.

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Mesh Content Team