IRS Issues Draft Form 6765 Revisions, Finally Some Good News

2024-07-30

On June 21^st, the IRS issued a revised draft of Form 6765 to be used by taxpayers when claiming the federal Research & Development (R&D) tax credit. The new draft includes several changes to the prior draft issued in September 2023. Based on feedback received, the IRS significantly streamlined Section G Business Component Information. Specifically, this section will now be optional for Qualified Small Businesses (QSBs) and those with qualified research expenses equal to or less than $1.5M or with $50M or less in gross receipts during the current tax year. There was also a reduction in the number of business components that must be reported in the same section. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Draft Form 6765 Revisions

In the original draft Form, Section F, now labeled Section G, has been changed to optional for certain taxpayers that meet the requirements of qualified small business (QSB) or those with research expenditures totaling equal to or less than $1.5 million and that have equal to or less than 50 million of gross receipts. The total amounts must be done on the controlled group level, meaning you must total the amounts from all related entities. Section F in the most recent draft form aids taxpayers in determining if they must complete Section G.

The scope of what must be reported in the new Section G has also been reduced. Now, taxpayers need to report 80% of total research expenditures by business component, which for the IRS would mean the project in descending order based on the size of expenses spent in each project. So, if you have ten projects, with five that makeup 80% of the total costs for a given year, then only those five projects would need to be reported. The limit on business components to report is also capped at 50. In addition, there are unique reporting options for taxpayers relying on the ASC 730 directive. Per the draft Form 6765, the ASC 730 directive is only allowed for taxpayers with more than $10 million in assets that follow U.S. GAAP in preparing Certified Audited Financial Statements report R&D. Section E remains the same and requires information pertaining to officer’s wages included in the total research expenditures, if there were any acquisitions or dispositions, or any new categories of spending reported in the current year.

It is important to note that for tax year 2024, which is the 2025 filing season, Section G will be optional for all taxpayers. The new regulations apply to taxpayers with more than $1.5 million in total research expenditures or with equal to or greater than 50 million in gross receipts beginning in tax year 2025.

Amended Return New Requirements

The IRS recently also lessened the reporting requirements for claiming R&D on an amended tax return. Previously, there were 5 requirements, which have now been reduced to the following 3:

• Identify all business components related to the refund claim. Best practices include listing each by number, project name, and the type of business component, such as product, process, formula, invention, technique, or software;
• Then, for each business component (or project) listed, provide a summary of the research activities performed; and
• Lastly, report the total qualified employee wage, supply, computer lease/rentals, and/or contractor expenses included in the R&D refund claim. This portion can be done by including the Form 6765.

Specifically, if you look at the best practice example provided in FAQ number 20 released by the IRS, steps 3 and 4 have been eliminated as of June 18, 2024. These steps included:

• The names or job categories of the individuals who performed each research activity; and
• The information each person or job category sought to discover.

While these requirements have been eliminated from initial reporting for a refund claim, it is essential to note that the IRS may still request this information in the event of an exam. You can also submit a report or documentation so long as each of the 3 requirements is clearly flagged and indicated on the relevant pages.

As a reminder, you must amend both the corporation and personal returns for pass-through entities. For the amended 1040, it may be beneficial to include a statement that describes the purpose for the amendment and reconciles the amount claimed with the amended K-1. It may also be helpful to include copies of Form 6765 and the amended K-1 with the statement.

We’re Here to Help

The recently published updates to Form 6765 are some of the most significant in many years. Companies must carefully review their R&D approach and determine if it will align with new requirements. If you have questions about the information outlined above or need assistance claiming the R&D credit, JLK Rosenberger can help. For additional information, call 949-862-9902 or click here to contact us. We look forward to speaking with you soon.