# How R&D time allocations work

Most R&D credit calculations rely on estimates, surveys, or manual time tracking—all prone to errors and IRS scrutiny.

### The Problem We Solve

Most R&D credit calculations rely on estimates, surveys, or manual time tracking—all prone to errors and IRS scrutiny. NeoTax uses the existing ticket data to create an objective, defensible allocation based on actual work patterns.

### Our Two-Step Process

**Step 1: Calculate effort for each task**
We analyze the ticketing data using three signals:

- Timeline data (start, progress, review, completion dates)
- Task complexity (bug fix vs. architecture design)
- Individual work patterns (normalized to account for different working styles)

**Step 2: Allocate effort by project**

- Sum effort across all tasks in each project
- Calculate each project's percentage of total effort
- Apply R&D qualification at the project level

### Why This Method Works

#### **Objective and Audit-Ready**

Your allocation is based entirely on contemporaneous business records—the same ticket data you use to manage projects. No subjective estimates or after-the-fact reconstructions.

#### **Handles Real-World Variations**

**"How can I verify the calculation?"**
Every step is transparent and reproducible:

- Individual task efforts are visible in the Ticketing tab
- Project allocations can be cross-checked using the pivot table method described below
- The final R&D percentage is simply the sum of qualified project percentages

**"What about people with different numbers of tickets?"**
Our normalization process accounts for individual work patterns. Someone who creates 50 small tickets and someone who works on 5 large features both get accurate allocations based on actual effort, *not ticket count.*

**"What about job title differences?"**
The base calculation treats all qualified technical work equally based on the task complexity and the timeline data in the contemporaneous ticketing data. This produces a clean, auditable quantitative effort approach instead of mixing quantitative data with job-title assumptions assumptions. 

You can layer in role-based adjustments afterward if needed. See below for how we handle VPs and other senior roles with low/no-ticket volume.

#### **Designed for Compliance**

This approach aligns with IRS expectations for R&D credit documentation:

- Based on contemporaneous records
- Systematic and consistent methodology
- Clear audit trail from raw data to final allocation

### **Detailed Example:**

Here’s all the tasks for Taylor Swift in the tax year.

![Screenshot from How R&D time allocations work](https://vaffozzswoq4jjsz.public.blob.vercel-storage.com/help-center/7786b483-bd25-44df-b03b-88ec5025422c/rd-time-allocations-1.png)

First the system calculated an Effort value for each task.

Then the system calculates the relative amount of Effort on each Project.

![Screenshot from How R&D time allocations work](https://vaffozzswoq4jjsz.public.blob.vercel-storage.com/help-center/05202bea-d851-44a7-87d7-8202e5d2a579/rd-time-allocations-2.png)

The percent per project is the value shown in the R&D Report > Expenses by Project (Credit) sheet and the Wages page in the application.

**Verification Steps**

> **Tip:** To check this, pivot the *Tickets by Project by Person* sheet with:
>
> This should match the R&D Report > Expenses by Project (Credit).
>
> Expect 1-5 percentage point differences due to rounding.

R&D % is then calculated by summing the percent for all projects that are R&D qualified.

In this case, if Rocketship and AI Model are R&D projects⇒  R&D % = 62%

### **How does this work?**

1. **Calculate the effort for each task/ticket in each month.** 

This is done using a multi-factor model that looks at:

- Change logs - when it was started, in progress, in review, completed
- Weighted by the content of the task (eg: minor bug fix vs a large architecture design)
- Normalize the data by person, so that the effort per task reflects all other work in progress at the same time

The result is an estimated Effort value per task. This value is shown in the Ticketing tab.

1. **Calculate the relative amount of effort on each project**

Sum the effort of all the tasks in each project.

Then divide by the total effort.

The result is a percent of effort per project.

Leftover effort is allocated to nonproject time.

#### Handling Senior Roles with Low Ticket Volume

For most employees, tickets fully capture their work — people who use the ticketing system regularly leave a complete, contemporaneous trail of the effort behind every project.

That breaks down for a specific group of roles. VPs, highly compensated leaders, and people in non-R&D departments often have zero tickets — and when they do have a handful, that small number usually doesn't reflect what they actually spent the year doing. Allocating their R&D purely off two or three tickets can just as easily overstate or understate their real involvement.

For these roles, it's more accurate to allocate effort based on the **number of days of effort captured over the year**, rather than treating a thin set of tickets as a complete picture. This keeps every employee's R&D time tied to substantiation in the underlying records — which reduces risk on audit.

##### How this works

Instead of taking the tickets as a person's *entire* year, we measure the effort those tickets represent and express it against the working year:

> **R&D % = Sum of effort days from tickets ÷ business days in the tax year**
>
> Business days are computed for each tax year as weekdays minus US federal holidays — typically around **251 days** — so the denominator reflects that specific year's calendar rather than a fixed number.

Any remaining time falls to non-project time, exactly as it does in the base method. The result is an allocation anchored to real, logged work — just scaled to the reality that these roles only touch the ticketing system occasionally.

**Example — Dana, VP of Engineering**

Dana leads engineering. She only occasionally files tickets herself, but the few she does log tie to real R&D work. Across the tax year, her tickets represent **24 days of effort**.

| Measure | Value |
| --- | --- |
| Effort days from tickets in R&D qualified projects | 24 days |
| Business days in the tax year | 251 days |
| **R&D % = 24 ÷ 251** | **≈ 9.6%** |
| Non-project time (remainder) | ≈ 90.4% |

The 9.6% stays tied to substantiated, logged work. Supervisor allocation, below, can then add back the qualified leadership time her own tickets never capture.

##### Who this applies to

By default, the initial treatment applies to:

- **VPs and above**
- **Non-R&D departments**

Because the meaning and role of titles, departments, ticket usage, and risk levels vary so much from company to company, we work with you during implementation to calibrate the right level for your company.

We compare these roles against their prior-year baseline and provide a recommendation, so the threshold reflects how your organization actually works.

##### Combining with supervisor allocation

For senior people who manage R&D teams, the [Supervisor R&D Calculation](/help-center/rd/supervisor-rd) method can make the final R&D % even more accurate. It captures time spent **supervising and directing R&D** — design reviews, architecture decisions, unblocking the team — that isn't reflected in a manager's own assigned tickets. Used together, the days-of-effort approach grounds the allocation in substantiated work, and supervisor allocation adds back the qualified leadership time that tickets alone will always miss.

### When to Make Adjustments

This method provides an accurate baseline for most employees. You might consider adjustments for:

- **Supervisors/managers** with minimal ticket activity
- **Support roles** not captured in ticketing systems
- **Company-wide policies** (e.g., standard non-project time allocation)

These adjustments maintain the objective foundation while accommodating your specific business context.

### Bottom Line

This approach gives you defensible R&D allocations rooted in your actual work patterns, not estimates. It's designed to withstand audit scrutiny while being practical for companies of all sizes and ticketing practices.

### FAQ

**How does this handle PTO, leave, sick days?**

Our relative allocation methodology excludes this non-time from the calculation, in accordance with Treas. Regs. §§1.41-(d)(1) and 1.41-(d)(2). 

R&D% is calculated as the sum of allocation percent on qualified projects / total effort on projects, as derived from the ticketing data. 

This excludes time spent on leave, PTO, etc since that time is not logged in the ticketing data and so none of it is allocated to projects.