Let's go through that step-by-step...
Companies engaged in research and development activities may be entitled to a credit on their tax return. In general, a company may qualify for R&D tax credits if they have invested time, money and resources in activities that contribute to creating or improving a product, process, technique, formula, invention or software application system. Amounts paid for wages, supplies, or contract research may be factored into the credit calculation.
In order to claim the credit, companies must provide contemporaneous documentation that links an employee’s time directly to an R&D project or activity. This documentation takes the form of two methods: project approach and departmental approach.
The project approach relies on a taxpayer’s time-tracking documentation to directly link an employee’s hours to a specific qualified R&D project.
The departmental approach relies on oral testimony, contemporaneous engineering documentation, job descriptions, educational background and other information to develop a time estimate.