Be Ready: IRS Announces Significant Updates to Research Tax Credit for 2024
The IRS announced the release of a revised draft Form 6765, Credit for Increasing Research Activities, on June 21, 2024.
While the changes are generally seen as improvements over the prior draft the IRS proposed last year, the Form 6765 changes introduce more comprehensive reporting requirements, significantly increasing the workload for taxpayers. These updates reflect the IRS's commitment to enhancing tax administration but also indicate a shift towards more detailed documentation of research activities.
This marks a significant change in the approach to claiming research tax credits, necessitating careful attention and adaptation from taxpayers.
Background on Form 6765 Changes
The initial draft of the revised Form 6765 was released on September 15, 2023, introducing a new Business Component Detail section and various other changes aimed at enhancing the reporting process.
After soliciting and reviewing feedback, the IRS made several adjustments, notably reducing the number of business components that must be reported. Now, taxpayers are only required to report components that account for 80% of their total Qualified Research Expenses (QRE), up to a maximum of 50 components.
This approach, while streamlined, still demands a significant amount of data collection and reporting from taxpayers, marking a notable increase in effort from previous years. The revised Section G of the form will be optional for all filers for the tax year 2024, which provides a transition period for taxpayers to adjust to the new requirements. For the tax year 2025, this section will become mandatory, with the streamlined requirements firmly in place.
Exemptions from New Reporting Requirements
Certain companies will be exempt from some of the new reporting requirements. Specifically:
- Qualified Small Business (QSB) taxpayers, as defined under Internal Revenue Code Section 41(h)(1) and (2), who elect to claim a reduced payroll tax credit, will find Section G optional.
- Companies with total QREs of $1.5 million or less and gross receipts of $50 million or less, as determined under Section 448(c)(3), when claiming a research credit on an originally filed return, will also not be required to complete Section G.
These exemptions are designed to alleviate the burden and streamline the compliance process for smaller businesses.
What’s Required in the New Form 6765 Sections?
The revised draft of Form 6765 introduces several new sections designed to capture a comprehensive view of research activities:
Section E—Other Information
- Number of business components worked on during the tax year
- Amount of officer wages
- Acquisitions and dispositions
- Whether any of the QREs were determined under the Accounting Standards Codification (ASC) 730 directive
Section F—Qualified Research Expenses Summary
An expense breakdown of:
- Total wages
- Supplies
- Rental or lease cost of computers
- Contract research expenses
These line items have been moved from Section A and B on prior year forms.
Section G—Business Component Information
- Controlled group member information and activity codes
- Business component names and types
- Software designations
- Information sought to be discovered
- Wage expenses broken out between direct research, direct supervision, and direct support by business component
- Cost of supplies, rental or lease cost of computers, and contract research expenses by business component
What Does This Mean for Filing R&D Tax Credits for the 2024 Tax Year?
Companies planning to claim the R&D credit in the 2024 tax year must be ready to complete these three new sections of the form when filing their tax returns. While Section G will be optional for tax year 2024, it’s crucial for taxpayers to understand its requirements ahead of its mandatory implementation in the following year.
The changes, although designed to streamline some aspects, generally increase the complexity and volume of information that must be reported.
Response to Feedback
The IRS has incorporated feedback from taxpayers into these revisions, which has been crucial in shaping the less-burdensome aspects of the new requirements. However, despite these efforts to reduce complexity, the overall increase in reporting obligations can still pose significant challenges for many taxpayers.
The IRS is expected to release new instructions to clarify the type of business component, definitions for officers, controlled group reporting, and business component names.
Updates to Refund Claim Requirements
Parallel to the changes in Form 6765, the IRS also revised the reporting requirements for refund claims involving the research credit. Effective June 18, 2024, the IRS reduced the documentation needed when filing a refund claim.
Notably, the requirement to provide the names of individuals performing each research activity and the specific information each individual sought to discover has been waived, although this information may still be requested during an audit.
While this update reduces some of the administrative complexities associated with filing refund claims, it still requires taxpayers to identify all business components related to their Section 41 research credit claim, detail all research activities performed, and provide total qualified expenses for employee wages, supplies, and contract research for the claim year.
We’re Here to Help
For help managing the new requirements on draft Form 6765 or the updated refund claims requirements, please reach out to your Moss Adams professional.