On Friday, June 21, 2024, the U.S. Internal Revenue Service (IRS) released a revised draft of Form 6765, the form used by taxpayers to claim the I.R.C. § 41 Credit for Increasing Research Activities, more commonly referred to as the R&D Tax Credit. The revised draft updates several of the proposed changes to Form 6765 that were introduced by the IRS in September 2023. These changes aim to alleviate some of the preparation burden on small businesses while still providing taxpayers with a consistent and predefined format for reporting, as well as improving the information received for tax administration.
Background
On September 15, 2023, the IRS released a preview of the proposed changes to Form 6765 that will take effect beginning with Tax Year 2024. The initial draft introduced Section F, “Business Component Information,” requiring detailed quantitative and qualitative data for each business component included in the research credit claim. The IRS sought feedback from interested stakeholders on the proposed changes and whether the new Business Component Information section should be optional for certain taxpayers.
New Proposed Changes to Form 6765
The new draft form released on June 21, 2024 removes several requirements from the previous version and introduces a new threshold to protect small businesses from extensive reporting. Most of these changes pertain to business component information reporting, which has since been updated from Section F to Section G. Key proposed changes include:
- A reduction in the number of business components that must be reported on Section G. Taxpayers should now include information for each business component in descending order by the amount of total qualified research expenditures (QREs) per business component, up to a maximum of 50 business components or 80% of total QREs, whichever is lesser of the two. Additionally, special instructions will be given to taxpayers following the ASC 730 directive for determining QREs, which will allow taxpayers to report ASC 730 QREs as a single line item in Section G.
- A decrease in the amount of business component information required in Section G. Specifically, the requirement to specify whether a business component was new or improved, its use (i.e., sale, lease or license), and a summary describing the information sought to be discovered (for original returns only) has been eliminated. Additionally, the options for selecting the type of business component have been reduced, and the instructions will provide clearer definitions for officers, controlled group reporting and business component descriptive names.
- Offering the reporting of business component information in Section G to be optional for:
- Qualified small businesses electing the payroll offset under IRC 41(h)(1) & (2), or
- Taxpayers claiming a research credit on an originally filed return who have total QREs equal to or less than $1.5 million, determined at a controlled group level, and equal to or less than $50 million of gross receipts, as described under Section 448(c)(3) (without regard to subparagraph (A) thereof).
The Section G requirement will be optional for all taxpayers for Tax Year 2024 to allow taxpayers sufficient time to adjust substantiation methods and transition to the new Section G format. The proposed requirements will go into effect for Tax Year 2025 (processing year 2026).
What happens now?
While the recent updates to the draft Form 6765 provide relief for some taxpayers, the new form includes substantial changes that may pose challenges for others. Taxpayers should review documentation practices and the new draft form to ensure the appropriate level of detail is being collected and maintained to satisfy the updated requirements. The final form and instructions are expected to be released at a later date.
Schneider Downs’ Credits and Incentives team has extensive experience helping taxpayers maximize their R&D Credits while navigating everchanging tax rules and regulations. As the R&D Credit requirements continue to evolve, Schneider Downs can assist taxpayers with tax support and services, ensuring proper documentation and compliance with the latest guidance from the IRS.
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