Best Practices For Tracking R&D Expenses In QuickBooks Online (QBO)

The Research and Development (R&D) Tax Credit is a valuable incentive for businesses investing in innovation. Properly tracking R&D expenses in QuickBooks Online (QBO) can help you claim the credit efficiently while staying compliant with tax regulations. QBO provides robust tools to streamline the tracking process, making it easy to organize your records for tax filing or audit purposes.

Here’s how you can set up and manage R&D expense tracking in QBO like a pro.

1. Create a Dedicated R&D Expense Account

Start by creating a specific account in your Chart of Accounts to separate R&D expenses from other operational costs.

How to Set It Up:

1. Navigate to Settings > Chart of Accounts.
2. Click New to create a new account.
3. Select Expense as the account type and name it “R&D Expenses” or something similar.
4. Save the account.

Best Practice:

Consider creating sub-accounts to categorize expenses further (e.g., wages, materials, contractor costs). This provides more detail for reporting purposes.

2. Use Classes or Tags for R&D Projects

QBO’s Classes are great tools for tracking specific projects or departments.

How to Set It Up:

1. Go to Settings > Account and Settings > Advanced.
2. Turn on Track Classes.
3. Create classes for each R&D project (e.g., “Project Alpha,” “New Product Development”).

Best Practice:

Assign classes or tags to every R&D-related transaction to easily group expenses by project or initiative.

3. Record Employee Wages for R&D Activities

A significant portion of R&D expenses often comes from employee wages. Use QBO Payroll to allocate wages accurately.

How to Track Wages:

1. Use the payroll feature in QBO to track employee hours.
2. Create a class or tag for R&D and assign it to hours worked on R&D activities.
3. Ensure that wages for R&D hours are recorded under the R&D Expense account.

Best Practice:

Encourage employees to track their time consistently and allocate hours to R&D activities accurately.

4. Track Contractor and Supplier Costs

Expenses related to contractors and suppliers are also eligible for R&D credits.

How to Record:

1. Assign bills or expenses to the R&D Expense account when entering transactions for contractors or suppliers.
2. Attach supporting documents, such as invoices or contracts, to each transaction in QBO.

Best Practice:

Keep a digital copy of all invoices and agreements for easy reference during audits or tax filing.

5. Attach Documentation to Transactions

QBO allows you to upload and attach supporting documents to each transaction, ensuring your records are audit-ready.

How to Do It:

1. When entering an expense, click the Attach File option.
2. Upload relevant documents, such as receipts, contracts, or time logs.

Best Practice:

Attach documentation at the time of data entry to save time and reduce the chance of missing files later.

6. Generate R&D Expense Reports

QuickBooks Online offers customizable reports to track and review R&D expenses.

How to Create a Report:

1. Go to Reports and select Profit and Loss or Transaction List by Account.
2. Filter the report to show only R&D expenses using the classes, tags, or accounts created earlier.
3. Export the report for review or share it with your CPA or tax advisor.

Best Practice:

Run monthly or quarterly reports to ensure your expenses align with R&D tax credit requirements.

7. Reconcile Your Accounts Regularly

Reconciliation ensures that your records are accurate and match your bank statements.

How to Reconcile:

1. Go to Accounting > Reconcile in QBO.
2. Match your R&D-related transactions with your bank and credit card statements.

Best Practice:

Perform reconciliations monthly to catch errors early and maintain accurate records. If you are already a Hive KPO customer, we will complete this for you and reach out with any question and confirm R&D Project Totals. 

8. Work with a HIVE KPO

Claiming the R&D tax credit requires detailed documentation and compliance with specific regulations. Contact the Hive KPO Team to make claim your R&D Tax Credit with ease.