Recent Indiana Department of Revenue decisions show strict interpretation of documentation requirements for R&D credit


Letter rulings recently issued by the Indiana Department of Revenue disallow research expense credits based on insufficient documentation (IN Department of Revenue Letters of Findings 02-20190975 & 02-20191105). Although the department acknowledged that in some cases the evidence pointed to the performance of qualifying R&D activities, the documentation was insufficient to meet the taxpayers’ burden of establishing they were entitled to claim credits for research expenses in Indiana.


The state of Indiana provides for an “Indiana qualified research expense” tax credit, which follows the federal credit for increasing research activities, with some modifications. Recent letter rulings delivered by the Indiana Department of Revenue have furnished a clearer understanding of the ways in which the state’s documentation requirements differ from those imposed by the Internal Revenue Code, as interpreted by the U.S. Tax Court. The state of Indiana has applied a strict interpretation, disallowing credits substantiated by employee oral evidence to calculate qualified research expenses (QREs).

The federal regulation governing substantiation requirements for research credits states that taxpayers claiming credits “must retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.” In Union Carbide Corp. v. Commissioner of Internal Revenue, the courts held that employee testimony, affirmed by some documentation, was sufficient to substantiate wage QREs. The recent letter rulings released by the Indiana Department of Revenue make clear that Indiana’s interpretation of the federal statute requires particular attention to be paid to the documentation supporting QREs.

Although it is unknown whether the taxpayers at issue in the letter rulings provided compelling corroborating evidence to support employee testimony related to wage QREs, the text of the rulings suggests that no after-the-fact testimony, recollection, or interview will be permitted to support credits calculated. Per the Department of Revenue, “interviewing employees to reconstruct the activities believed to qualify (or not qualify) is insufficient in determining what employees did and whether such expenses qualify for the research credit.” Instead, documentation must be contemporaneous. While this is similar to the federal requirement, federal examiners and federal courts have accepted oral evidence in conjunction with other documentary evidence to support claims, while Indiana appears to solely accept contemporaneous documentation.