Changes to Federal Form 6765 for Clients Claiming the R&D Tax Credit

In late 2022, the IRS alerted taxpayers and the accounting industry that changes were coming to the reporting requirement for the Research and Development (R&D) tax credit on Form 6765. Fortunately for taxpayers, the IRS has provided a draft of the proposed form for tax year 2024.

The new requirements include disclosure of business component details and associated wage expenses at the time of tax return filing.

These new requirements will make R&D credit claims more data-focused, with the overall goal of saving taxpayer money by guiding IRS compliance resources and reducing fraudulent claims. Unfortunately, smaller credit claims may become effort-prohibitive, especially when company data doesn’t enable wage allocation to specific business components.

While the required data points are not burdensome individually, the combination of details needed will add significant time and effort to data collection, analysis, and presentation to complete Form 6765 as proposed for tax years beginning on or after January 1, 2024.

The good news is that taxpayers are being alerted prior to the beginning of the tax year to get into compliance or develop methods to allocate expenses.

Furthermore, the IRS wants to keep the rules for how companies maintain their financial records, but they’re open to allowing some filers to choose not to report as much detail. They are actively seeking input on the possibility of allowing certain taxpayers, such as those with a credit or Qualified Research Expenses (QREs) below specified thresholds or those who qualify for the Payroll Tax Offset under Section 41(h), to opt for less-detailed reporting.

On September 15, 2023, the IRS released a preview of the proposed changes to Form 6765, Credit for Increasing Research Activities being considered for tax year 2024. These changes are intended to provide taxpayers a consistent and predefined format for tax reporting and improve the review process for the IRS.

The first thing to notice is that even before providing any financial information, the form asks yes/no questions about taking the 280C election and if the company is a member of a controlled group. This will help alert the IRS software and reviewers to potential complications or interactions with other companies. This ensures a company is correctly taking the reduced credit if they are not reducing deductions in the amount of the credit.

There are no substantive changes to Sections A – Regular Credit and B – Alternative Simplified Credit. While the purpose of Section C – Current Year Credit remains largely consistent, additional on-form instructions have been added to line 39.

Section D – Qualified Small Business Payroll Tax Election and Payroll Tax Credit also adds additional check boxes to help clarify how the company is handling the credit, especially in case of acquisition or entity change. Note that the form also includes the update to the Payroll Tax Offset under Section 41(h) amount, which increased to $500,000 for 2023.

The biggest changes start in the new Section E – Other Information. The IRS is collecting data around the count of business components (IRS term for “projects”) included, identifying officer wages being included as QREs, checking for transactions such as an acquisition or disposition, and flagging the consistency requirement as something to pay attention to.

While few of our clients are leveraging the ASC 730 directive for safe-harbor, other companies may be. The form requests disclosure of the ASC 730 amount.

Section F – Business Component Information, also new, asks questions about the specific projects included in the credit and for the taxpayer to break out all the QREs by business component. Furthermore, the direct wages will need to be allocated between direct conduct of qualified research, direct supervision, and direct support. These amounts are added up, and those figures flow into sections A or B.

Companies with time-tracking and project-level accounting will generally be able to perform the arithmetic required to allocate expenses by business component and type of contributor. Making sure all expenses are properly coded to the relevant business component. Also, have a brief description available to complete line 50(d), to substantially meet the requirements.

Companies with no time-tracking (or poor adherence) and accounting systems that do not allocate expenses to specific projects must track additional information to comply with the new requirements. Here are some suggestions on what to do to prepare for the 2024 changes:  

1. Include the project (business component) name in General Ledger entries, ideally as a separate field. Even listing it as a part of the additional information entered would be helpful.

2. If the company is considering time-tracking but hasn’t committed yet, implement it as soon as possible for all technical personnel. In addition to substantiating the R&D Credit, this also provides visibility into the actual project development costs.

3. If the company does not have time tracking, consider quarterly surveys that include a project list and time allocation. These contemporaneous surveys often provide better data than a single end-of-year survey, and reduce the risk of data loss with staff departures.

4. Maintain a list of business components that includes key information such as:

We will continue monitoring updates to form 6765, working to help our clients transition during the 2023 filing season to enable compliance with the final version of the form. Contact us to learn more.