The IRS has recently introduced important changes to Form 6765 for claiming the Research and Development (R&D) Tax Credit. These updates focus on new qualitative information requirements in Section G, affecting how businesses report Qualified Research Expenses (QREs). Here’s an overview of the key changes you need to be aware of:
Key Updates on Form 6765: What You Need to Know
What’s New in Section G?
Section G now requires taxpayers to provide detailed qualitative information for up to 50 business components. These components include:
- Business Component Name
- Business Component Type
- Information Sought to Be Discovered
Additionally, taxpayers must report qualified costs by both cost type and business component. A key change is the cap on the number of business components that must be represented, which could reduce the effort for some businesses.
New Questions in Section E
Section E introduces new questions that require additional qualitative information, such as:
- The number of business components generating QREs
- The amount of officer wages included in QREs
- Any major acquisitions or disposals in the tax year
- New categories of expenditures claimed as QREs
- Whether ASC 730 guidelines were used to compute QREs
These additions help provide the IRS with more detailed insight into your R&D activities.
Timeline and Exemptions
These changes will apply to tax years starting in 2024. However, there are some exemptions:
- Section G will be optional for businesses that qualify as Qualified Small Businesses (QSB) under IRC Section 41(h)(1) or (2) or have less than $1.5 million in QREs and less than $50 million in gross receipts.
- For 2024, Section G will be optional for all taxpayers. However, it will be mandatory in 2025, unless the taxpayer meets specific exemptions.
What This Means for Taxpayers
With these updates, taxpayers should consider adopting a more systematic approach to capture the necessary qualitative information. Keeping a detailed list of R&D projects throughout the year and utilizing cost-tracking systems can make completing the form easier. Additionally, starting the R&D study earlier in the year will ensure that all information is available when it’s time to file.
Even though Section G won’t be mandatory until 2025, the information it asks for is likely to be required during an IRS audit. Therefore, it may be beneficial to start complying with these reporting requirements sooner rather than later.
Why Are These Changes Happening?
In recent years, the IRS has become more focused on ensuring that R&D credits are properly supported with detailed documentation. Court cases such as Little Sandy Coal v. Commissioner have highlighted the IRS’s increased demand for project-specific accounting and contemporaneous records. To address this, the IRS started requiring qualitative information for amended returns claiming R&D credits in 2021. The draft Form 6765 now formalizes these documentation requirements for all R&D claims.
Summary of Changes
- Section A: New questions on credit election and controlled groups.
- Section E: Additional questions regarding qualitative information.
- Section G: Taxpayers must provide detailed information about each business component and report qualified research expenses by component.
With these updates, the IRS is making it clear that R&D tax credit claims will need to be better supported with both quantitative and qualitative data. Taxpayers should start preparing to meet these new documentation requirements, especially if they plan to claim the R&D tax credit in the coming years.
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