251011_Implementation of Enhanced Time & Expense Categorization for R&D Credits

Notification: Implementation of Enhanced Time & Expense Categorization for R&D Credits

From: Colabmo, LLC

To: All Clients & Partners

Effective Date: November 1, 2025

Prepared by: Diggy R. Breiling

Contact: info@colabmo.net | 941-416-1578

1. Purpose

As a result of multiple requests from our clients, Colabmo is implementing a simplified and comprehensive system for time and expense categorization across all projects, including work performed by Colabmo directly and by our Subject Matter Experts (SMEs).

This initiative supports both internal initiatives and clients who wish to document and claim federal and state Research & Development (R&D) tax credits, while improving clarity in billing for operational and non-R&D activities. Our goal is to streamline your Controller’s or CPA’s review process, improve eligibility tracking for R&D-related expenditures, and strengthen compliance documentation.

2. Implementation Overview

Beginning November 1, 2025, every Colabmo timesheet entry and expense record will include a required Activity Category that indicates if a billing for time or material is likely an R&D expense for tax purposes. This system applies to all ongoing and future client projects. This may be indicated by timesheet entry, task, or project.

With some limitations, upon request, Colabmo can retroactively categorize expenses for the 2025 calendar year to align with this system. Additionally, pre-November 2025 expenses will be retroactively categorized, as our current system is already close to compliance, requiring only a review and addressing any gaps.

Activity Categories (Initial Phase)

Category	Purpose
R&D (Tax Credit Eligible)	Experimental design, prototyping, testing, process innovation, and product or software development. Eligible for federal and state R&D credits (IRS §41; CA RTC §23609; GA §48-7-40.12; NY Excelsior Program; FL §220.196; OH §5733.35).
Operations (Deductible Expense)	Production, administrative, finance, logistics, marketing, training, and resale/distribution tasks. Deductible as standard business expenses.

Each entry will also include a concise technical or operational description (e.g., “Prototype assembly fixture, adjust D4 ratio 0.3–0.5%”) to strengthen documentation for CPA or tax authority review.

Future Expansion: As we gather client feedback, Colabmo may expand Operations into subcategories such as Production, Marketing, QMS, and Training to support more detailed reporting. Clients will be notified when additional categories are introduced.

3. Development Phase and Client Input

Colabmo is actively developing and testing these updates through Q4 2025. During this period, we welcome input from clients on structure, categories, and reporting preferences. Please submit feedback by November 1, 2025, to ensure timely integration before the system goes live.

If your accounting or compliance team would benefit from customized tagging or reporting, please contact info@colabmo.net with the subject line “Timesheet Categorization Feedback.”

Additionally, required training for all Colabmo Subject Matter Experts (SMEs) will be conducted during the week of October 19, 2025, to ensure proper and consistent implementation. We are also available to meet with clients to answer any questions about the new system, please reach out to schedule a discussion.

4. Reporting Options for Clients

• R&D Summary Reports: Colabmo will provide, upon request, a summary of R&D hours and expenditures for the 2025 calendar year once the system is fully live.
• Quarterly Export: Excel/CSV roll-up of hours, rates, and categories suitable for CPA import.
• Detailed Timesheets: Task-level detail and supporting notes available for R&D-eligible work.

Standard fees apply for any additional time required to generate these reports, though such time is expected to be minimal.

5. Benefits to Clients

• Tax Credit Support: Structured data for claiming R&D credits at federal and state levels.
• Transparency: Differentiates innovation-related work from standard operational activities.
• Audit Readiness: Provides contemporaneous documentation for CPA and tax authority review.
• Custom Reporting: Enables tailored reporting by project, department, or activity category.
  Note: Clients should maintain their own records (e.g., contracts, project plans, and IP agreements) to complement Colabmo’s tracking, as these are critical for IRS and state audits.

6. State Program Notes

When applicable, certain state programs may extend R&D tax credit eligibility to outsourced or contract research activities, provided the work is performed within the state and meets the same technical and documentation requirements as in-house R&D. Colabmo’s tracking system is designed to support this by clearly designating outsourced consultant time under the R&D category when the activity qualifies. The state where work is performed will be noted in the tracking system to support state-specific credit claims.

State	Program Overview	Notes for Clients
California	R&D credit under RTC §23609, conforming to federal definitions. Claimed via FTB Form 3523.	Verify qualified research definitions and carryforward rules with CPA.
Georgia	Credit under O.C.G.A. §48-7-40.12 based on incremental research above base period.	May offset income tax or payroll withholding (subject to approval).
New York	Excelsior Program R&D component for certified firms.	Credit up to 50% of the federal R&D portion for NYS activity; certification required.
Florida	Florida R&D Credit under F.S. §220.196, conforming largely to IRC §41; limited annual cap, claimed by approved businesses.	Check for annual state allocation and timing deadlines.
Ohio	Ohio R&D Investment Credit (O.R.C. §5733.35) offers a nonrefundable credit based on qualified research expenditures.	Credit can offset corporate income tax liability; carryforward available.

Note: Colabmo’s categorization supports documentation but does not constitute tax advice. Clients should confirm eligibility and computation methods with their CPA or appropriate professionals.

7. Implementation Schedule

• October 19, 2025: SME training begins.
• November 1, 2025: Enhanced Activity tracking goes live for all new timesheets and expenses.
• November–December 2025: Migration and re-tagging of active projects, including retroactive categorization of pre-November 2025 expenses, leveraging the near-compliant current system with a review to address any gaps.
• January 2026: First CPA-ready summaries and R&D reports available.

8. Client Feedback and Support

We appreciate your collaboration as we refine this system. Please share suggestions on structure, reporting preferences, or CPA documentation needs by November 1, 2025. Our objective is to make this process as useful as possible for your 2025 and future tax filings.

We are available to meet with clients to answer any questions about the new system, please contact us to schedule a discussion.

Email feedback to: info@colabmo.net

Phone: 941‑416‑1578

Appendix A — CPA Reference (Federal & State R&D Programs)

Federal R&D Credit (IRC §41)

• Outsourced Research: Contract research performed by external consultants may qualify when the taxpayer retains substantial rights in the results and bears the financial risk. Colabmo’s categorization captures subcontracted and consultant time to support this determination.
• Qualified Research: Involves technological uncertainty, experimentation, and reliance on hard sciences.
• Eligible Costs: Wages, contract research, and consumable supplies.
• Documentation: Timesheets, experiment logs, and test data.
• Section 174 Interaction: Development costs may need to be capitalized and amortized for tax years beginning after 2021.

California (RTC §23609)

• Outsourced Research: California generally follows federal treatment, allowing contract research costs if performed within California and meeting eligibility requirements.
• Conforms closely to the federal definition but has unique computation rules and state-specific credit percentages. Claimed via FTB Form 3523.

Georgia (O.C.G.A. §48-7-40.12)

• Outsourced Research: Qualified research expenses may include work performed by external contractors located in Georgia; the taxpayer must document oversight and retain rights to results.
• Credit based on incremental qualified research spending; can offset state income tax and potentially withholding tax. Carryforward allowed.

New York (Excelsior Program)

• Outsourced Research: Consultant or contract research performed in New York State may qualify if conducted under the certified entity’s project plan and supporting records are maintained.
• Certification-based program granting R&D credits tied to the federal credit component for qualifying activities within NYS. Administered by Empire State Development.

Florida (F.S. §220.196)

• Outsourced Research: Contract research performed in Florida may qualify when meeting the same definitions of qualified research; allocation of expenses must be supported by documentation and contractual scope.
• Limited annual allocation for the Florida R&D tax credit. Credit equals 10% of qualified research expenses exceeding a base amount, capped per state allocation cycle.

Ohio (O.R.C. §5733.35)

• Outsourced Research: Consultant or subcontractor work may qualify as qualified research expenditures if performed within Ohio under the taxpayer’s control and included in total QREs.
• Nonrefundable R&D credit equal to 7% of qualified research expenses exceeding a base amount, with unused credits carried forward up to seven years.

Appendix B — CPA Documentation Checklist

• Timesheets with Activity Category and descriptive notes.
• Technical documentation: hypotheses, methods, and results.
• Test data and version logs.
• Invoices and contracts specifying R&D scope.
• Payroll/contractor summaries for R&D-tagged tasks.
• Expense receipts linked to R&D projects.
• Location-based tracking (for state nexus validation).
  Recommendation: Clients should maintain a project summary or narrative to tie together all documentation, ensuring a cohesive record for IRS or state audits.

Appendix C — Federal R&D Credit Clarification (IRC §41)

The Federal Research Credit under IRC §41 provides a dollar-for-dollar reduction in tax liability for businesses conducting qualified research activities. The following expands on how employee and contractor time is treated, and the applicable percentage limitations for each expense type.

1. Outsourced (Contract) Research
2. • Eligibility: Contract research performed by external consultants may qualify when the taxpayer retains substantial rights in the results and bears the financial risk of the research outcome.
   • Credit Limitation: Only 65% of qualified contract research expenses are credit-eligible under IRC §41(b)(3).
   • Exclusions: Payments made to contractors who retain ownership of results or are paid only upon success do not qualify.
   • Colabmo Tracking: Colabmo’s system flags subcontracted or consultant time as R&D when supported by documentation showing client ownership and risk, aiding CPA evaluation for the 65% inclusion rule.
3. Employee Wages (Internal Staff)
4. • Eligibility: 100% of wages for employees who directly perform, supervise, or support qualified R&D activities.
   • Qualified Roles: Engineers, programmers, scientists, technicians, and direct supervisors engaged in experimentation or testing.
   • Non-Qualified Roles: General administrative, HR, or unrelated business management functions.
5. Eligible Cost Categories
6. • Wages: Internal labor performing qualified research.
   • Supplies: Non-depreciable materials consumed in testing or prototyping.
   • Contract Research: 65% of qualifying contractor costs.
   • Workstation/Cloud/Server Usage: May qualify when directly supporting experimentation or simulation activities. These costs often face scrutiny in audits, requiring detailed justification linking usage to specific R&D activities (e.g., simulation, testing, or modeling).
7. Documentation Requirements
8. • Contemporaneous timesheets identifying R&D hours.
   • Experiment logs, lab notes, and test data.
   • Contracts and statements of work demonstrating that the taxpayer retains rights and bears risk.
   • Design revisions, change logs, and technical narratives showing experimentation and uncertainty.
     Colabmo’s categorization process ensures these linkages are built into project records, supporting CPA review and audit readiness.
9. Interaction with Section 174 (Capitalization Rule)
   For tax years beginning after December 31, 2021, R&D expenditures (wages, materials, and contract costs) must be capitalized and amortized over:
10. • 5 years for U.S.-based research, or
    • 15 years for foreign research.
      This requirement changes the timing of deductions but does not eliminate the availability of the R&D credit under §41.
11. Summary Table

Expense Type	Qualifies for Credit	Credit % Allowed	Key Conditions
Employee Wages (Direct, Supervision, Support)	Yes	100%	Must relate to qualified research activities.
Contractor / Consultant Payments	Yes	65%	Taxpayer retains rights and bears financial risk.
Supplies Used in R&D	Yes	100%	Consumed or destroyed during experimentation.
Cloud / Server Usage for Development	Yes (case-by-case)	100%	Supports testing or modeling for qualified R&D; requires detailed justification.

Appendix D — Ownership and Shared Credit Clarification

1. Overview
   Under IRC §41 and Treas. Reg. §1.41-2(e), only one party may claim the R&D tax credit for a given qualified research expense. However, both the client and the contractor/consultant may retain intellectual property or usage rights to the results of the research. The determination of who may claim the credit depends on two factors: financial risk and substantial rights.
   Clients are encouraged to engage in discussions with Colabmo and document agreements on substantial rights (e.g., via contracts or IP agreements) to clarify credit eligibility and avoid disputes during audits.
2. Determining Who May Claim the Credit

Factor	Who Claims the Credit	Explanation
Financial Risk	The party who pays regardless of outcome	If the client funds the research on a fixed or hourly basis and must pay even if results fail, the client bears the risk.
Substantial Rights	The party that retains the right to use or exploit the results	If both retain rights, the IRS generally assigns credit to the party bearing the greater financial risk.

Key Rule: Both parties can retain ownership or usage rights to the R&D results, but only the party bearing the risk and cost of the research can claim the tax credit for that portion of expenditures.

1. Contractor/Consultant R&D Eligibility
   A contractor or consultant (such as Colabmo) may claim the credit only for the portion of research not reimbursed by the client and for which they bear financial risk.
   a) Unbilled or Self-Funded Hours
   If a contractor contributes significant unbilled hours toward experimentation, prototyping, or internal development, those hours may qualify as the contractor’s own R&D, provided:

• The work involves technological uncertainty and experimentation.
• The costs are not billed or reimbursed by the client.
• The contractor retains rights to the resulting process, method, or intellectual property.
  b) Material Costs Not Billed to Client
  Similarly, materials consumed during testing that are not reimbursed by the client can qualify as the contractor’s own R&D expenses if the contractor bears the cost and risk.

1. Credit Limitations and Examples

Scenario	Who Claims Credit	Notes
Client pays fixed fee and retains rights	Client	Client bears risk and owns results.
Contractor bears own costs and retains rights	Contractor	Contractor bears financial risk and owns results.
Both retain rights, client funds entire project	Client	Contractor reimbursed—no credit for them.
Contractor performs extra self-funded R&D beyond contract	Contractor (for that portion)	Only unreimbursed work or materials qualify.

1. Supporting Guidance

• IRC §41(b)(3): Limits contract research expenses to 65% inclusion for credit purposes.
• Treas. Reg. §1.41-2(e): Defines contract research and specifies risk and rights requirements.
• IRS Audit Technique Guide (ATG): Clarifies that research is performed “at the taxpayer’s own risk” if payment is not contingent on success.

1. Practical Application for Colabmo Projects
   Colabmo’s time tracking differentiates:

• Client-funded R&D: Time and materials reimbursed by the client, eligible under the client’s credit claim.
• Colabmo-funded development: Unbilled labor, materials, or prototype improvements retained internally, eligible for Colabmo’s own R&D credit claim.
  This distinction ensures that both Colabmo and its clients can document and claim R&D credits accurately for their respective qualifying expenditures.

Appendix E — Shared Development and Cost-Split Projects

This appendix provides a practical example of Appendix D, illustrating how ownership, financial risk, and cost-sharing arrangements are analyzed to determine R&D credit eligibility for both Colabmo and its clients.

Example: Development of NVIS-Absorbing Polymeric Optical Filter (Colabmo + Client)

Scenario:

Colabmo and a client jointly participated in the development of a night-vision imaging system (NVIS) absorbing polymeric optical filter designed to improve supply chain reliability via domestic production and performance enhancements in aerospace and display applications.

• Colabmo performed the technical research, experimentation, and formulation work, purchasing all raw materials and optical films.
• The Client funded approximately 30% of total development costs through partial billing.
• Multiple rounds of experimentation were conducted before success was achieved.
• Colabmo retained the proprietary formulation and underlying intellectual property (trade secret), while the Client retained the right to use the resulting material in its own products.

Sample Contract Clause for IP Ownership

To clarify substantial rights, clients and Colabmo should include clear IP ownership terms in contracts. Below is a sample clause:

Intellectual Property Rights: The Client shall retain a non-exclusive, non-transferable right to use the NVIS-absorbing polymeric optical filter developed under this Agreement for its own manufacturing and product applications. Colabmo retains full ownership of the proprietary formulation, processes, and trade secrets related to the filter, including the right to commercialize or modify the technology for other applications. All payments made by the Client are non-contingent on the success of the research, ensuring the Client bears financial risk for the funded portion.

Credit Allocation Analysis

Entity	Contribution	Ownership/Rights	R&D Credit Eligibility	Applicable Rule
Colabmo	70% self-funded (labor and materials)	Full ownership of NVIS filter formula and process	100% credit on self-funded portion	IRC §41(b)(2) – In-house R&D
Client	30% of costs billed and paid	Right to use NVIS material but not disclose or sublicense formula	65% of billed payments (contract research)	IRC §41(b)(3) – Contract R&D

Key Determinations

• Financial Risk: Colabmo bore 70% of the cost and risk due to unbilled experimentation and material purchases. The Client bore 30% of risk through its payment obligation regardless of success.
• Substantial Rights: Both parties retained substantial rights—Colabmo to commercialize or modify, the Client to apply the result within its own manufacturing.
• Credit Split: Each party may claim credit only for their own at-risk costs; no duplication of the same expenditure is permitted.

Documentation Recommendations

For Colabmo:

• Detailed timesheets and lab notes showing optical filter testing and iteration cycles.
• Material receipts and cost summaries distinguishing billed vs. self-funded portions.
• Technical records establishing experimentation (failed trials, measurement data, refinements).

For Client:

• Invoices and proof of payment for billed research.
• Documentation showing payment was not contingent on success.
• Agreement or correspondence granting right to use but not ownership of the formula.

Summary Table

Aspect	Colabmo	Client
Financial Risk	High (70%)	Moderate (30%)
Rights	Full ownership of polymeric NVIS filter formula	Limited right to use material
R&D Credit Eligibility	Yes – 100% on self-funded work	Yes – 65% of paid contract cost
Credit Type	Direct R&D Credit (§41(b)(2))	Contract Research (§41(b)(3))
Key Documentation	Timesheets, experiment notes, invoices, receipts	Invoices, proof of payment, usage agreement

Disclaimer

Colabmo’s enhanced tracking and categorization system is intended to assist clients with accurate documentation for potential R&D and related deductions.

This communication does not constitute tax, legal, or accounting advice. Clients should consult their independent CPA to confirm eligibility and compute benefits under current federal and state law.