The Kyocera R&D tax credit saga has taken a dramatic turn for the worse, and it's sending shockwaves through the innovation community. What started as a straightforward case about documentation requirements has evolved into a cautionary tale that should have every founder questioning whether their current R&D tracking practices are bulletproof. 

As we covered last August, Kyocera's initial $1.3 million R&D tax credit claim was denied by the IRS due to inadequate time tracking documentation. But here's the kicker: The case has now spiraled into a multi-million-dollar nightmare that could cost the company far more than they ever hoped to gain. 

The Plot Thickens: From $1.3M Denied to $13M+ Demanded 

The second issue, which brought the case back into the headlines, is a fascinating one: On March 12, the government countersued Kyocera, asserting that they'd received a $13.36 million 2018 tax refund in error, and that they now owe the government $13.36 million plus interest. 

Let that sink in. What began as Kyocera seeking an additional $1.3 million R&D credit has now become a scenario where they might owe the government over $13 million. Kyocera AVX Components Corp. told the US Tax Court the IRS has incorrectly asserted a new tax deficiency of about $2.3 million for its fiscal 2018 tax year, citing a notice of disallowance it received at the end of 2024, adding yet another layer to this complex litigation. 

A district judge in South Carolina has ruled that all the issues being disputed by Kyocera and the IRS are the exclusive jurisdiction of the Tax Court, meaning the two big questions being legislated will be settled in that court. The company is now fighting on multiple fronts, with potentially tens of millions of dollars at stake. 

The IRS's Message Is Crystal Clear: No Documentation, No Credit 

The government's position has become increasingly hardline. The Court should reject Kyocera's Section 41 credit claim because it failed to create or retain the documents required to substantiate its entitlement to the credit. Even more damning, PwC failed to keep records generated in its own study, nor did it provide them to Kyocera. 

This isn't just about Kyocera anymore. As the IRS put it, they will rely less on oral testimony, which it says should be "filling the potholes, not paving the road." The agency is drawing a firm line in the sand: Retrospective interviews and estimates won't cut it. 

The precedent established in the Little Sandy Coal v. Commissioner case from June 2023 is being applied ruthlessly. The courts have made it clear that "documentation on time spent on activities" was required to qualify for Section 41 refunds, and there's no wiggle room for creative interpretations. 

The Real Cost of Poor Documentation 

The years-long litigation has undoubtedly been extremely costly for Kyocera, and it also is not the kind of headlines you'd ever want as a company. Beyond the direct financial exposure, consider the hidden costs: 

  • Legal fees that likely run into the millions 
  • Executive time diverted from running the business 
  • Reputational damage in the industry 
  • Regulatory scrutiny that could affect future filings 
  • Lost opportunity cost of the credits they should have received 

This case perfectly illustrates why the stakes for proper R&D documentation have never been higher. We're not just talking about missing out on tax credits, but potential financial catastrophe. 

What This Means for Your Business 

The Kyocera case represents a fundamental shift in how the IRS approaches R&D tax credit enforcement. Here's what every innovative company needs to understand: 

  1. Contemporaneous Documentation Is Non-Negotiable

The Cohan rule does not apply in these circumstances, where Kyocera's lack of records means that it cannot demonstrate its entitlement to the section 41 credit at all, rather than only the amount being in question. The days of "we'll figure it out later" are over. 

  1. Third-Party Studies Won't Save You

Even hiring a Big 4 accounting firm like PwC couldn't save Kyocera from their documentation failures. The PwC study cannot cure Kyocera's failure to keep records. Professional credibility means nothing without proper underlying documentation. 

  1. The 80% Threshold Requires Proof

The US government has filed a motion to dismiss the claim "[b]ecause Kyocera did not track employees' time on particular projects included in the study," thus making it impossible for the company "to prove that the included employees satisfied the 80% threshold." 

Your R&D Time Tracking Action Plan 

Drawing from our experience helping hundreds of innovative businesses across North America successfully claim their R&D credits, here are the non-negotiable practices you need to implement immediately: 

Start With Real-Time Tracking 

Don't wait until tax season to figure out how your team spent their time. Implement systems that capture R&D activities as they happen: 

  • Project management tools that log time automatically (Jira, Asana, Monday.com) 
  • Version control systems that track development progress (GitHub, GitLab) 
  • Time tracking software integrated with your existing workflows 
  • Daily standups and retrospectives with documented outcomes 

Document the "Why" Behind Every Activity 

The IRS wants to see evidence of the experimental process. For every R&D activity, maintain records showing: 

  • Uncertainty being addressed: What technical challenge are you solving? 
  • Experimentation conducted: What alternatives did you test? 
  • Results and learnings: What worked, what didn't, and why? 
  • Process improvements: How did this inform future development? 

Maintain Clean Employee Allocation Records 

Track exactly how much time each employee spends on qualifying R&D work: 

  • Daily time logs tied to specific projects and activities 
  • Project descriptions that clearly establish R&D nature 
  • Supervisor approval of time allocations 
  • Regular reconciliation between time logs and payroll records 

Create an Audit-Ready Documentation System 

Assume the IRS will request detailed documentation. Organize everything so you can respond confidently: 

  • Centralized filing system for all R&D documentation 
  • Clear naming conventions that make records easy to find 
  • Regular backup procedures to prevent data loss 
  • Access controls to maintain document integrity 

Quarterly Documentation Reviews 

Don't wait until filing season to discover gaps in your records: 

  • Monthly team reviews of R&D activities and documentation 
  • Quarterly audits of time tracking accuracy 
  • Annual system updates to improve capture and organization 
  • Regular training for team members on documentation requirements 

The Boast Advantage: Turning Compliance Into Competitive Edge 

At Boast, we've helped hundreds of companies navigate the increasingly complex R&D tax credit landscape. Our platform integrates with the systems your team already uses, automatically capturing the contemporaneous documentation the IRS demands while reducing the administrative burden on your team. 

By connecting directly with your payroll, project management, and version control systems, we create an unbreakable chain of documentation that can withstand even the most aggressive IRS scrutiny. More importantly, we help you understand your R&D progress in real-time, enabling better business decisions while ensuring maximum credit capture. 

The difference isn't just in the technology—it's in our deep understanding of both the regulatory requirements and the realities of running an innovative business. We've seen companies lose millions in credits due to poor documentation, and we've helped others confidently defend eight-figure claims because their records were bulletproof. 

The Bottom Line: Prevention Is Cheaper Than Litigation 

The Kyocera case is a stark reminder that the cost of poor R&D documentation can extend far beyond missed tax credits. In a worst-case scenario, inadequate records could expose your company to penalties, interest, and years of costly litigation. 

But here's the opportunity: companies that get this right don't just protect themselves from downside risk—they gain a competitive advantage. Proper R&D documentation enables faster product development, better resource allocation, and more successful credit claims that can fund future innovation. 

The choice is yours. You can treat R&D documentation as an afterthought and hope for the best, or you can build systems that turn compliance into a strategic advantage. Given what we've learned from Kyocera's expensive lesson, the smart money is on preparation. 

Ready to bulletproof your R&D tax credit claims? Our team of experts can help you implement systems that capture maximum credits while minimizing audit risk. Talk to one of our specialists today and discover how proper documentation can become your competitive edge.