On June 21, 2024, the IRS released a revised draft of Form 6765, Credit for Increasing Research Activities, reflecting a focused effort by the IRS to combat improper R&D credit claims. The draft introduces significant changes that raise the filing effort, particularly in sections E, F, and G, demanding more detailed information from taxpayers upon their initial claim. These changes have left many taxpayers with questions and concerns about how they complete this information and when the new requirements will actually take effect. While small businesses benefit from some reprieve, further guidance from the IRS remains uncertain. Unfortunately, given the IRS’s competing priorities, it is unlikely that clarity will arrive in time for the 2024 tax return filing season.

Why Form 6765 is Changing

The changes to Form 6765 stem from IRS concerns about deficient and fraudulent R&D tax credit claims, especially for refunds. Starting in 2021, the IRS outlined stricter documentation requirements for refund claims, which included newly claimed or amended claims. The agency has now formalized these requirements for original claims within the revised form by incorporating them into the official filing process. As a result, the revised form demands more detailed reporting, particularly around “business component information.”

Key Changes in Form 6765

The June 2024 draft includes structural and content changes to increase transparency and detail in R&D tax credit filings. While some elements remain unchanged, several sections now require significantly expanded information, specifically at the business component level. Here’s what’s new:

1)Structural Changes for Clarity

• The reduced credit election under IRC Section 280C and controlled group filing reporting are now prominently displayed at the top of the form.

• Sections A through D, covering credit calculations and payroll tax elections, remain largely the same.

2)Expanded Information Requirements

Section E: Other Information

• Number of business components generating qualified research expenditures (QREs).

• Officers’ wages included in total wages for all business components.

• Acquisitions/dispositions of significant business portions.

• Identification of ASC 730 directive reliance for audited financial statement adjustments.

Section F: Qualified Research Expenses Summary

• Total wages, supplies, contract research expenses, and computer rental/lease costs by business component.

• Basic research payments applicable to QREs.

Section G: Business Component Information

• Detailed reporting for each business component, including:

• Controlled group EINs and principal business activity codes.

• Business component names or alphanumeric identifiers.

• Business component types.

• The software type (if applicable).

• The information that the research sought to discover.

• Allocated wages broken out into direct research, supervision, and support.

• Breakouts of costs for supplies, contract research, and computer rental/lease.

• Taxpayers are only required to report business components that account for 80% of their total QREs, up to a maximum of 50 components.

Certain companies will be exempt from some of the new reporting requirements:

• Section G remains optional for Qualified Small Businesses (QSBs) who elect to claim a reduced payroll tax credit.

• Businesses with $1.5 million or less in QREs and gross receipts under $50 million will also not be required to complete Section G when filing their returns.

For all other companies, Section G will remain optional for the 2024 tax year, becoming mandatory for 2025 returns. However, a word of caution: we are learning that the IRS’s playbook is to request this information in a 45-day letter for all projects claimed, not just the top 50. So it is a good practice to start now.

On the plus side, even though Section G is optional in 2024, it presents a unique opportunity for taxpayers. This transition period provides businesses with valuable time to familiarize themselves with the new reporting requirements, adjust their methodologies, and identify any gaps in their current documentation processes. It is better to start the process of dialing in the methodologies now, giving the company two filing seasons to flesh out the process.

By voluntarily attempting to comply with the new Section G requirements during the transition period, businesses can position themselves for smoother compliance when the section becomes mandatory in 2025. Additionally, this proactive approach allows taxpayers to seek clarification or feedback from the IRS and identify potential challenges while there may still be room for flexibility and adjustment. Waiting until the requirements are fully effective could limit opportunities to refine processes and address ambiguities. Please keep in mind it is unlikely the IRS will put the genie back in the bottle.

Open Questions and Concerns

The draft revision of Form 6765 has raised several questions among taxpayers. The lack of official instructions accompanying the draft form has created uncertainty regarding the specific documentation required to support claims. The draft form suggests potential reporting requirements for business components and other costs associated with research activities. However, the exact nature of these requirements remains unclear, leaving taxpayers to speculate about the level of detail required. Taxpayers are seeking clarification on:

1. Controlled Group Reporting: What specific rules apply for segments of businesses filing as controlled groups?

2. Business Component Information: What constitutes a valid business component name or alphanumeric identifier?

3. Definition of Officers’ Compensation: What qualifies as “officers’ wages” under the new requirements?

4. Software Categorization: How should software types be classified and reported?

Taxpayers are also concerned about the potential burden of complying with these new requirements, particularly for small businesses with limited resources. Taxpayers will now need to collect and organize these details earlier in the filing process. In the past, some information could be gathered post-filing during an audit; the new form suggests that such data must now be available when filing the initial claim.

These changes emphasize the importance of ongoing R&D studies and proactive record-keeping throughout the year. Businesses will need to invest more time and resources in documenting their research activities to comply with the new requirements. Preparation strategies might include:

1. Enhance Data Collection Systems: Businesses should implement tools or processes to track wages, expenses, and business component details as activities occur.

2. Reassess Reporting Methodologies: R&D studies must align with the form’s requirements, ensuring that all business components and expenditures are properly categorized. This includes breaking out expenses for each individual project into specific categories such as labor, supplies, and contract research.

3. Engage Experts: Working with R&D tax credit specialists can help navigate these changes and avoid compliance pitfalls. Additionally, a knowledgeable specialist can take on much of the additional burden of building the necessary documentation, maintaining compliance, and ensuring that claims meet the IRS’s reporting standards. By leveraging their expertise and administrative resources to build the required paperwork, clients can focus on their core business operations.

The Path Forward

The IRS’s revised Form 6765 reflects a stricter approach to ensure that taxpayers are making legitimate claims for R&D tax credits. The agency will also evaluate the submitted information to determine whether to approve the claim, forward it for audit, or deny it outright. While the expanded documentation requirements present new challenges, proactively addressing them with the support of the right business partner can ensure they don’t deter businesses from claiming these valuable credits–an essential source of working capital for small businesses.

Taxpayers awaiting further guidance should prepare now by meeting with an R&D tax credit specialist to evaluate their current documentation and accounting practices. A specialist can identify gaps, recommend practical and cost-effective improvements, and ensure compliance with the new standards. Ideally, the specialist will have the administrative resources to thoroughly review project records, deciphering who did what and what they sought to discover–relieving the company from diverting valuable engineering resources. By conducting regular R&D studies and enhancing documentation processes now, businesses can confidently claim the R&D tax credit and maximize its benefits heading into 2025.

Author Information

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm specializing in assisting businesses to attain and substantiate public economic incentives such as R&D and energy credits.

Rick Kleban is the founder and president of Sycamore Growth Group, an Ohio-based firm specializing in securing economic incentives that maximize cash flow and minimize risk.