Rippling

Overview

Rippling facilitates the calculation of Research and Development (R&D) tax credits by integrating its payroll platform with specialized third-party services that automate the identification of qualifying expenses. The system does not perform the tax calculation natively but provides the foundational data structure and integrations necessary for partners, such as Boast AI and Neo.Tax, to execute the analysis. This process leverages Rippling's core 'Employee Graph,' a unified data model that captures granular employee and payroll information. By acting as a single source of truth for workforce data, Rippling enables a continuous, year-round analysis of potential R&D tax credits, moving away from traditional, retrospective year-end audits.

Key Features

The technical mechanism begins with Rippling's payroll system, which captures detailed data points for each employee. These data points include job codes, departmental assignments, work locations, salary, bonuses, overtime pay, and equity grants. This rich dataset is the primary input for the R&D credit calculation. Integrated partners, connected through Rippling's app marketplace via APIs or secure data exports, ingest this payroll data. The partners' proprietary AI and machine learning algorithms then analyze the information to identify Qualified Research Expenses (QREs). The analysis maps employee roles and their associated wages to specific projects and activities. For example, the wages of an employee with the job code 'Software Engineer' working in the 'Product Development' department would be flagged for further review to determine the percentage of their time spent on qualifying research activities.

Technical Specifications

This process operates within the legal framework established by the Internal Revenue Service (IRS). The R&D tax credit is governed by Section 41 of the Internal Revenue Code, and claims are filed using Form 6765, 'Credit for Increasing Research Activities.' A significant provision for startups and small businesses is the ability for a Qualified Small Business (QSB) to apply the credit against its payroll tax liability. A QSB is generally defined as a business with less than $5 million in gross receipts for the credit year and no more than five years of gross receipts. The maximum annual credit that can be applied against payroll taxes was increased to $500,000. The integrated partners' systems are designed to generate the necessary documentation, including Form 6765 and Form 8974 for the payroll tax offset, based on the analysis of Rippling's data.

How It Works

In practice, as a company runs its payroll through Rippling, the data is continuously available to the connected R&D tax credit partner. The partner's platform provides a dashboard where the company can review potential credit amounts and the underlying data. This ongoing process allows for real-time visibility and proactive management of R&D activities and documentation throughout the year.

Use Cases

Limitations and Requirements

There are specific limitations and stringent requirements for an activity to qualify for the R&D tax credit. The IRS mandates that all research activities must satisfy a 'Four-Part Test.' First, the research must have a 'Permissible Purpose,' meaning it is intended to improve the function, performance, reliability, or quality of a business component. Second, it must aim to 'Eliminate Uncertainty' regarding the capability or method for developing or improving the product. Third, it must involve a 'Process of Experimentation,' which includes evaluating one or more alternatives. Finally, the process must be 'Technological in Nature,' fundamentally relying on principles of physical sciences, biological sciences, engineering, or computer science. Not all engineering or development work meets these criteria. Therefore, robust substantiation is critical. The integrated services help generate audit-ready documentation, such as project narratives and wage allocation worksheets, but the ultimate responsibility for compliance and accuracy rests with the company. Rippling itself does not provide tax or legal advice.

Comparison to Alternatives

This contrasts with the traditional method of conducting a time-consuming and often inaccurate study at the end of the tax year. The fees for these integrated partner services are separate from Rippling's subscription costs and vary based on the provider and the scope of services rendered.

Summary

In conclusion, Rippling's role in R&D tax credit calculation is that of a data provider and platform enabler. It automates the collection and structuring of the essential payroll and HR data required for the analysis. The actual calculation, compliance verification against the IRS Four-Part Test, and generation of tax forms are handled by specialized, integrated partners like Boast AI. This partnership model streamlines the process of claiming R&D tax credits by leveraging real-time workforce data, but companies must still ensure they meet all IRS substantiation requirements and should consult with qualified tax advisors.