Two Big Announcements for R&D Credit Documentation Requirements
The IRS recently announced several notable changes to the process of claiming the R&D Tax Credit, announcing welcome reductions to requirements for filing amended R&D Credit claims and reduced requirements for the proposed Form 6765.
In response to feedback, the IRS has revised the draft Form 6765 and has also waived some of the requirements for refund claims. These changes aim to reduce taxpayer burden while maintaining an improved level of information received for tax administration. The revised Section G of Form 6765 will also be optional for all filers for tax year 2024 and will become effective for tax year 2025.
Revisions to Draft Form 6765
The IRS released the revised draft Form 6765 on June 21, 2024. The changes to the draft form center on Section G, which asks for detailed information on R&D activities and expenses. The specific changes are as follows:
- Caps are now placed on the number of business components to be submitted
- Business components provided now only have to account for 80% of QREs
- Total number of business components listed is capped at 50
- Companies following the ASC 730 directive will have special instructions and report ASC 730 QREs as a single line item on section G
- Information required for each component has been simplified as well, removing
- whether a business component is new/improved
- If the R&D was related to a sale/license/lease
- The information sought to be discovered
- To the relief of many small businesses, Section G also will now be optional for some taxpayers, such as
- Qualified Small Businesses, defined under section 41(h)(1) & (2) who claim a reduced payroll tax credit
- Taxpayers with total qualified research expenditures equal to or less than $1.5 million, and equal to or less than $50 million of gross receipts, as determined under section 448(c)(3) (without regard to subparagraph (A) thereof), claiming a research credit on an original filed return.
Waived Requirements for Refund Claims
In addition to the revision of the draft Form 6765, the IRS has also issued a notice on June 18, 2024, that waives two of the items required for filing amended returns claiming the R&D Credit. The notice is effective for refund claims filed on or after June 18, 2024, and before October 15, 2024.
Moving forward, the IRS is waving two of the "5 Items" previously requested for amended R&D Credit claims:
- The names of those who performed each research activity
- The information each person sought to discover
The remaining three items will still be expected on amended R&D Credit claims moving forward:
- Identify all the business components to which the I.R.C. § 41 research credit claim relates for that year.
- For each business component, identify all research activities performed;
- Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year
Though the notice states that the IRS is waiving these requirements to expedite processing of refund claims, it cautions that the items still may be requested if the claim is selected for examination, highlighting the importance of proper documentation of qualifying R&D activities and an audit ready technical report for each year an R&D Credit is claimed.
A Welcome Change, but Be Prepared
The changes are a welcome pullback of challenging requirements the IRS has been seeking to impose on the R&D credit filing process, providing a small relief to taxpayers burdened by the increased documentation requirements and other challenges created by the required amortization of R&D expenditures. It is important to remember that while the new form 6765 is reduced in scope, it is still a significant increase in documentation requirement for timely filed R&D claims and will be a hurdle for any taxpayers who are unprepared come the 2025 tax season.
Taxpayers should work with their tax advisors to prepare and begin implementing any changes to their R&D tracking and documentation necessary to gather all required information in a timely manner.
ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country. Contact us to learn more about the R&D Tax Credit.
About the authors
Tyler Bonts
Director
Tyler leads the firm’s research credit, §45X advanced manufacturing, and utility sales tax exemption practices. He developed and launched the §45X and utility-study service lines and supports clients from eligibility assessment through interviews, documentation, calculation, filing coordination, and audit defense.
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Alexander Bagne
President · JD, CPA, MBA, CCSP
Alex is the President of ICS Tax, LLC (ICS). His expertise includes fixed asset reviews, cost segregation, the 179D and 45L energy efficiency incentives, accounting methods, research tax credits, and IC-DISC export incentives. Prior to ICS, Alex worked for a decade with several Big Four firms, including Ernst & Young, Deloitte Tax, and PricewaterhouseCoopers. His specialized planning ideas have saved his clients millions in tax dollars. He has given Continuing Professional Education on a variety of tax planning ideas throughout the country. He is published in the AICPA's Tax Adviser magazine and Accounting Today.
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