An Alternative Approach to Tracking Research and Development Tax Credits Utilizing ScrumWorks® Pro

For many managers adopting Scrum, one of the hardest traditional project management practices to leave behind is tracking hours spent. It’s not hard to let go of because tracking hours is essential to effective management, but because Scrum’s tenets of self-empowerment and transparency are in direct conflict with that kind of micromanagement. Granted, this is a very controversial topic and debates about the misuse of “estimates” versus “actuals” have raged on Danube’s blog, around the blogosphere, in Certified ScrumMaster courses, and at tradeshows worldwide.

But even in the early stages of development for ScrumWorks, Danube was contacted by numerous companies — from gaming developers to government contractors to professional services companies — that all wanted the ability to track hours spent in ScrumWorks Pro for tax purposes. They argued that even if the Scrum philosophy had no use for tracking hours, business reality did. When I looked into it, I began to see that tracking hours for tax purposes and Scrum didn’t have to be mutually exclusive.

So I got to thinking, “Why not report this information at the macro level? Isn’t the IRS simply concerned with effort, as opposed to time?” When I ran the idea of tracking Research and Development tax credits at the PBI level past my tax advisors, I explained the general Scrum framework, the concepts behind sprint review and planning meetings, and stressed that tracking hours indeed lowers developer productivity. I also explained how by utilizing themes, organizations could track which PBIs were deemed “done” and then relate them as a percentage of total completed PBIs for the sprint. Moreover, that percentage could then be compared against the total payroll line.

Here’s an example. Imagine 20 story points of a possible 60 in a single two-week sprint were themed with the “R+D Credit” tag. During the sprint review meeting, the team earns all 60 of its story points. Utilizing a web report, the organization’s CPA confirms that the themed items do, in fact, qualify as Research and Development according to relevant FASB ruling. Thus, the organization’s controller can then mark one-third of that sprint (or payroll period) as “R+D” credit capable, thereby beginning an incremental process of preparing for the organization’s year-end financial meeting.

This method of tracking backlog items with themes is still an unproven method and readers are strongly encouraged to consult their tax advisor for professional counsel regarding tracking effort and reporting tax credits. However, this blog could be a great starting point for a conversation with your CPA about non-evasive, Scrum-friendly ways to track Research and Development credits.

Posted in Agile

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