Latest IRS draft Form 6765 continues expanding documentation required for R&D tax credit claims

The Internal Revenue Service (IRS) has issued a revised draft of the 2024 Form 6765, “Credit for Increasing Research Activities,” which taxpayers use to claim the R&D tax credit. The process started with the release of an initial draft in fall 2023. Comments in response to that draft have resulted in the June 2024 release of a modified draft. A significant portion of the changes to the form focus on the reporting of “business component information,” an area that taxpayers previously might have been asked to support in detail upon IRS examination, but it wasn’t reported on the Form 6765 when filing the tax return for an initial credit claim.

Here’s a summary of how we got to this point, a look at the current proposed changes, and thoughts on some open questions and the potential impact of the new form on initial claims for the credit.

IRS concerns with fraudulent R&D tax credit refund claims

In 2021, in an attempt to curb what the IRS perceived as an increase in fraudulent claims for refunds based on the R&D tax credit, the IRS imposed expanded documentation requirements on amended returns that included a new or modified claim for this tax benefit. It seems likely that officials felt this program was a success, resulting in the current proposed modifications that would require additional supporting documentation for initial claims of the credit.

New information requested and other changes on latest draft of Form 6765

Compared to previous versions of the form used to the claim the R&D tax credit, the June 2024 revised draft includes changes and expanded information requirements. For starters, the reduced credit election under Internal Revenue Code (IRC) Section 280C, and the reporting for controlled group filers have been moved to the top of the form for greater visibility. The calculation of the credit under Sections A, B, and C, as well as the qualified small business payroll tax election and payroll tax credit under Section D, remain significantly similar to previous versions of the form. From there, the proposed form starts to expand into greater detail to support claims for the credit, such as: 

• Section E — Other Information — requires information, including:
  • The number of business components generating qualified research expenditures (QREs).
  • The amount of officer’s wages included in the calculation of “total wages for all business components.”
  • Acquisitions and dispositions of major portions of a trade or business.
  • New categories of expenditures included in the calculation of current year QREs.
  • Indication of whether reliance on the ASC 730 directive was used (this allows taxpayers with audited financial statements to start with financial statement amounts for research expenses and adjust to conform with federal tax rules.)
• Section F — Qualified Research Expenses Summary — requests new information like:
  • An analysis of whether the taxpayer must complete Section G on business component information in order to determine which Section F reporting procedures to follow.
  • Total wages, supplies, contract research expenses, and rental/lease cost of computers across all business components.
  • The applicable amount of all basic research payments.
• Section G – Business Component Information — requests detailed information on each business component that the taxpayer is required to report, including:
  • The EIN of each controlled group member conducting the activities.
  • Each controlled group member’s principal business activity code.
  • The business component name or alphanumeric identifier.
  • The business component type.
  • The software type (if applicable).
  • The information that the research sought to discover.
  • Direct research wages for qualified services.
  • Direct supervision wages for qualified services.
  • Direct support wages for qualified services.
  • A column for total wages related to qualified services.

Section G also includes a business component-level breakout of the total costs reported in Section F, for supplies, computer rental or lease costs (typically cloud hosting services for development environments), and contract research expenses.

Open questions on Form 6765 as taxpayers await instructions for claiming the R&D tax credit

One quirk in this process of releasing drafts of Form 6765 is that the IRS has yet to release any draft instructions for the proposed new document, which leaves a lot of open questions for taxpayers. Some of the answers those taxpayers will be looking for in the instructions include:

• A definition of what to consider “officers’ compensation.”
• Rules defining which segments of a business may be subject to “controlled group reporting” within each taxpayer’s tax return.
• Clarification on what constitutes an acceptable business component name or “unique alphanumeric identifier.”
• Processes for properly categorizing different software types under the new classifications on the form.

Taxpayers looking to comply with the new requirements of the revised form should understand they may be looking at a methodology change both in how business components are reported in an R&D study and how they might need to be tracked differently throughout the year. While certain details may have been collected later in the process in prior years, the accelerated timing imposed by the new form may require that more details are available at the time of filing.

With the IRS ramping up documentation and reporting requirements to substantiate initial and amended claims for the R&D tax credit, it’s clear that regular R&D studies are key to support those claims and effectively document business components and QREs.