Background
In September 2023, the Internal Revenue Service (IRS) issued suggested changes to Form 6765, Credit for Increasing Research Activities, a form used by taxpayers to claim the Internal Revenue Code (IRC) Section 41 Credit for Increasing Research Activities (otherwise referred to as the “Research and Development” or “R&D” tax credit), and requested feedback from taxpayers and tax preparers.
The original draft Form 6765 included new inquiries on several types of information, including questions about acquisitions and dispositions of any major portion of a trade or business and the amount of the executive officers’ wages that was considered as qualified research expenditures. The initial proposal also added a new section on Form 6765 for “Business Component Information”, which would have significantly changed the process of claiming the Federal Research and Development (R&D) credit as it required extensive qualitative and quantitative data for every business component for which the R&D credit was claimed.
After strong opposition by taxpayers and tax preparers, the IRS released a revised draft Form 6765 on June 21, 2024.
Notable Changes to Form 6765 per June 21, 2024 Draft:
- Section F:
- Information in Section F is rearranged, such as the Qualified Research Expense (QRE) data (the total qualified employee wage, supply, and contract research expenses) for the tax year.
- This section was also renamed to “Qualified Research Expenses Summary”
Section F requires more detailed information on qualified research expenses (QREs), including specific types of expenses and how they relate to each qualified business component. This can help ensure that only legitimate and properly documented R&D activities are claimed.
By demanding more detailed reporting, the IRS aims to improve the accuracy of claims and reduce the risk of errors or fraudulent claims. This can also aid in more effective audits and compliance checks.
Businesses must provide better documentation to support their claims. This can lead to improved internal processes for tracking and managing R&D expenditures.
- Section G: Known as the “Business Component Detail” section, this will be optional for:
- A Qualified Small Business (QSB), defined under IRC 41(h)(1)&(2) who check the box to claim a reduced payroll tax credit; OR
- Taxpayers with gross receipts of $50 million or less and total QREs of $1.5 million or less (note, there are control group level considerations to consider).
- Section G: Known as the “Business Component Detail” section, this will be optional for:
- Section G Reduced Number of Business Components & Scope: The IRS reduced the number of business components that must be reported in Section G for larger taxpayers that do not meet the requirements above.
- Taxpayers must report the required data for each business component in descending order by 80% of total QREs or the amount of total qualified research expenditures (QREs) per business component, up to a maximum of 50 business components, whichever is smaller.
- Taxpayers are no longer needed to describe whether a business component is a license/sale/lease, improved/new, etc. Overall, the amount of information required to be provided for each business component was reduced.
- Section G Reduced Number of Business Components & Scope: The IRS reduced the number of business components that must be reported in Section G for larger taxpayers that do not meet the requirements above.
Changes in Section G often involve adjustments to how the credit is computed or allocated among various qualified business components. This can affect the total credit amount a business is eligible to claim.
For businesses with multiple related entities, the changes might alter how the credit is allocated among these entities. This can impact financial reporting and strategic decisions about R&D activities.
Adjustments in how the credit is computed or allocated can add complexity to the process, requiring more sophisticated calculations and a better understanding of the new rules. This emphasizes the need for businesses to be thorough and seek tax professional advice to ensure compliance.
Overall, these changes aim to enhance the integrity of the R&D tax credit system, making it more transparent and precise, which is beneficial for both the IRS and businesses. For companies claiming these credits, it’s crucial to understand the new requirements to maximize their benefit while ensuring compliance.
Instructions for filing will be released at a later date by the IRS.
The revised Section G will be optional for all filers for tax year 2024 and will become effective for tax year 2025.
Prepare for the Changes Today
The R&D tax credit is a top incentive for Companies to substantially reduce their federal and state income (and in some cases, payroll) tax liabilities. Contact our team today regarding these future changes and how it may affect your eligibility for potential credits so that you may start planning for the documentation requirements to maximize your tax benefits.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.