Changes are coming for businesses claiming the Research Tax Credit on Form 6765, Credit for Increasing Research Activities. Support documentation revisions for those claiming the credit on amended returns will soon apply to credits claimed on an original return as well. Form changes will require more information beginning with the 2025 tax year (unless postponed again by the IRS).

New Documentation Requirements

In 2023, the IRS issued an initial draft of Form 6765 that includes the new “five items of information” required by the IRS to substantiate a research credit refund claim. These five action items are:

1. Identify all the business components to which the Section 41 research credit claim relates for that year.
2. For each business component, identify all research activities performed.
3. Name the individuals who performed each research activity.
4. Name the information each individual sought to discover.
5. Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. 

After extensive public comments, a revised draft of Form 6765, Credit for Increasing Research Activities was released this year that attempts to lessen the compliance burden.

Draft Form 6765 Revisions

Optional Reporting for Business Component Detail: New Section G, which requests business component detail, is optional for Qualified Small Business (QSB) taxpayers or those with total qualified research expenditures (QREs) of $1.5 million or less and $50 million or less of gross receipts. 

Reduced Scope of Business Component Detail: The number of business components that must be reported has been reduced. Taxpayers are only required to report 80% of total QREs in descending order by the amount per business component, but no more than 50 business components. 

Simplified Information Requirements: The amount of information required for each business component has been reduced. For example, the IRS has eliminated the need to specify whether a business component is new or improved and the narrative requirement for original returns.

Proposed Timing for Implementation

New Section G will be optional for tax year 2024 to allow time to transition to the new format. However, it will become mandatory for tax year 2025 for those who don’t meet the exceptions mentioned above. 

Although this information will not be required on original returns until 2025 tax returns are filed, businesses that have not previously maintained this level of documentation should review and prepare now for these upcoming reporting changes. 

Your RubinBrown representatives are prepared to assist with developing the procedures and documentation needed to comply with these new requirements. Please reach out with any questions or concerns.
 

Published: 11/15/2024

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