New Guidance on Changes to R&D Credit Reporting and Documentation: Form 6765

After considering comments from taxpayers and tax professionals, the IRS has released an updated draft version of the 2024 Form 6765. This new draft requires significantly more information than is required on the current Form 6765 but is not as detailed as the proposed version released by the IRS in 2023.

Background

Historically, taxpayers have claimed the research and development (R&D) credit by filing Form 6765, which required the taxpayer to report the total amount of qualified research expenses (QRE) broken down by category. In recent years, the IRS began signaling that additional information from taxpayers could be required when reporting the R&D credit. In 2021, the IRS began requiring more information for refund claims (generally only applicable to amended returns). In 2023, the IRS again released a new proposed version of Form 6765.

Key Changes for 2024

To understand the new version of the form, it’s important to understand the history of the reporting requirements for the research credit.

• Current Version in Use: The only information required to be reported regarding the current year research activities is the total amount of QRE by expense type (e.g., wages, supplies, etc.).
• 2023 Proposed Version: This proposed version drastically changed the reporting requirements and it was unclear whether it would apply to all taxpayers of if there might be an exception for small business taxpayers. The IRS used this as an opportunity to solicit feedback.

Fast forward to today and the newly proposed Form 6765. It is drastically different than the current version, but there are significant improvements compared to the 2023 version. On one hand, taxpayers should be relieved that the newest version is not as burdensome as it would have been under the initial proposal. However, taxpayers are still concerned about all the new reporting requirements.

Specifically, the new version of Form 6765 would have the following significant changes:

• Required for All Taxpayers: Instructions have not been released but it appears all taxpayers will have to provide:
  • The number of business components claimed;
  • The amount of officers’ wages included;
  • Whether the taxpayer acquired or disposed of any major portion of a trade or business in the tax year;
  • Whether the taxpayer included any new categories of expenditures in current year QRE; and
  • Whether the taxpayer used the ASC 730 Directive.
• Taxpayers who have more than $1.5 million of QRE or $50 million of gross receipts and are not electing the payroll tax credit are also required to report additional information. Reporting the information is optional for taxpayers who make the payroll tax credit election or are under both of the thresholds referenced above.
• The additional reporting requires these taxpayers to provide the following information for the business components (in descending order) that make up 80% of the total QRE or for up to the largest 50 business components:
  • The controlled group member performing the research activities;
  • Business component name or unique alphanumeric identifier;
  • Type of business component (g., product, process, etc.);
  • If software, whether it is internal-use software (IUS) or non-IUS;
  • Describe the information sought to be discovered;
  • Wages broken down by business component into the following categories: direct research wages for qualified services, direct supervision for qualified services, or direct support wages for qualified services; and
  • Supplies, rental, or lease cost of computers and the applicable amount of contract research expenses by business component.

• Schedule G will be optional for 2024 to allow taxpayers time to modify their processes to comply with the new requirements. It will be required in 2025 and beyond for taxpayers above the threshold discussed above.

What Does This Mean for Taxpayers Claiming the Credit?

The good news is that the new Form 6765 requires less information than the proposed 2023 version. Additionally, making many of the changes optional for small taxpayers is a significant improvement. Despite these improvements, taxpayers do have some areas for potential concern:

• The new form continues to demonstrate the IRS’ focus on the R&D credit which has been, and will likely continue to be, an area of focus in exams.
• Taxpayers that are subject to the additional business component reporting will likely need to assess their current information gathering process and become more granular to comply with the requirements.
• For many, one of the largest challenges will be for taxpayers to break down their wages into performing research, direct support, and direct supervision. Many taxpayers track or allocate time by project but do not also have employees track or allocate time by activity. This will require additional administrative work for taxpayers by using time surveys and, in some cases, time tracking.
• Although certain businesses are not subject to the most detailed business component reporting information, this provides a roadmap of what would be requested upon IRS audit. In other words, you may not need to report this information on Form 6765, but you should still collect and retain the information.

For further guidance or assistance with your R&D credit claims, please contact your KSM advisor or complete this form.