Navigating the Changes to IRS Form 6765: Implications for R&D Tax Credits

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By Sanjiv Gaitonde

On September 15, 2023, the IRS released proposed modifications to specific sections of federal Form 6765, known as the Credit for Increasing Research Activities (R&D tax credit or research credit). Although the IRS hasn't provided additional updates on these proposed changes since September, its website indicates a potential implementation of the new Form 6765 for tax year 2024. This article aims to offer a summary of Form 6765, highlight the proposed adjustments, and discuss the potential challenges these changes may pose for taxpayers seeking to claim an R&D credit in tax years 2024 and beyond.

The IRS has recently unveiled proposed adjustments to Form 6765, that may impact filings for tax year 2024 and beyond. Form 6765, also known as the Credit for Increasing Research Activities, currently spans four sections allowing taxpayers to compute their federal Research and Development (R&D tax) credit using different methodologies. However, recent court cases, such as Little Sandy Coal v. Commissioner, found, in part, that qualified research requires substantially all the activities constitute elements of a process of experimentation for a qualified purpose in IRC Section 41(d)(3), underscore the need for contemporaneous documentation to support R&D tax credits claimed.

Proposed changes

The proposed changes to Form 6765 include:

Addition of Qualitative Questions

Two questions preceding Section A now focus on the reduced credit under IRC Section 280C and membership in controlled groups or businesses under common control.

Section E – Other Information

Questions include the number of qualified business components, the amount of officer wages, any acquisitions or dispositions, and new sources of Qualified Rehabilitation Expenditures (QREs). The presence of some of these may lead to heightened scrutiny by the IRS.

Section F – Business Component Information

This section mandates the most significant informational burden, requesting detailed qualitative and quantitative data for each business component generating the credit. Taxpayers must provide:

  • Descriptive names
  • Categories (product, process, computer software, etc.)
  • Descriptions of the experimentation process and alternatives evaluated
  • Whether the component was new or improved, and
  • Categorized wage expenses allocated to each business component (direct, supervision, or support), amongst other information.

AICPA comments

The IRS is offering a preview to gather input from stakeholders before the formal draft release of the revised Form 6765. Some of these proposed adjustments aim to address feedback received from taxpayers and tax professionals. The American Institute of Certified Public Accountants (AICPA), the national professional organization for Certified Public Accountants in the U.S. with over 428,000 members in 130 countries, submitted a comment letter on October 30, 2023, expressing concerns about the proposed changes.

The AICPA recognizes the administrative burden these changes may have on all taxpayers, particularly small businesses. They stated, "Additionally, the new requirements may deter many taxpayers from claiming the credit as the time and cost to comply will significantly reduce the benefit of the taxpayer in claiming the credit."

The AICPA recommendations include clarifying the proposed changes to Section E to consider a multitude of taxpayer fact patterns to gather data to risk assess credit claims, informing higher quality outputs; modifying Section F for fewer target questions; and clarifying instructions related to Sections E and F for taxpayers that use statistical sampling to determine QREs.

Key takeaways

The revised Form 6765 for tax year 2024 will potentially bring significant changes to how the R&D tax credit is claimed and how research activities and expenses are reported. These proposed changes may become effective for the 2024 tax year impacting tax filings that would be filed in calendar year 2025.

The AICPA's comments highlight the potential challenges and concerns that taxpayers, especially small businesses, may face with the new requirements. It emphasizes the importance of seeking guidance and clarifications on the updated sections of Form 6765 to avoid potential pitfalls and ensure accurate reporting of R&D activities and expenses.

For businesses claiming R&D credits, adopting business component-based analysis, maintaining meticulous records, and keeping contemporaneous documentation readily available will be crucial for meeting IRS expectations and successfully claiming research credits in the future. Taxpayers should consider a business component-based study to accurately identify QREs by business component. This will include identifying qualifying business components, qualifying costs, developing a nexus between the two and providing the requested information for each business component.

Next steps

Rethink your accounting strategies

Given the IRS's emphasis on specific business components, consider implementing time tracking or job costing strategies to contemporaneously substantiate your Qualified Research Expenses (QREs).

Maintain contemporaneous technical documentation

With the IRS expecting QREs to be reported on a business component level, maintaining contemporaneous documentation is crucial. Real-time reporting allows for the collection of detailed information from subject matter experts and officers involved in R&D, ensuring accuracy and robust documentation to support your tax credit claim.

Enlist R&D tax credit experts

As the R&D landscape evolves and scrutiny increases, working with R&D tax credit specialists can be invaluable. These experts can help you identify qualified business components and costs and help to develop a clear nexus between the two. Their expertise can maximize your credits and identify opportunities that may have been overlooked, while helping maintaining compliance with IRS rules and regulations.

Continue to claim the credit

Despite the proposed additional reporting requirements, the R&D tax credit remains a substantial corporate benefit, providing a benefit of up to 10% of qualifying spend on employee wages, contracted research, and supply costs related to new development efforts. While compliance demands may seem burdensome, they are worth meeting for a reward you've already earned.

Look no further

Companies like ADP provide an unparalleled combination of tax credits experience, expertise, technology and resources to help make claiming tax credits as simple, streamlined and as predictable as possible by collaborating with clients' CPA firms throughout the process, assisting with questions related to filing or amending tax returns to claim the R&D credits and providing insight on the most effective ways to utilize the credit.

By maintaining relationships with federal, state and local government agencies to help continuously monitor changes in legislation and compliance requirements, ADP can provide proactive information and insights, as well as ongoing audit support.

Learn more about how ADP can help you develop a successful R&D tax credit recovery strategy.

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