Is Your Company Ready for Expanded R&D Tax Credit Reporting?

Despite the federal research and development (R&D) tax credit being well known for its complexity and subjectivity, the tax return reporting requirements have been surprisingly straightforward.

For as long as most practitioners can remember, Form 6765, Credit for Increasing Research Activities, has been less than two full pages and solely focused on the quantitative aspects of the credit claim for originally filed tax returns.

Proposed changes to Form 6765, however, will significantly change R&D tax credit reporting beginning with tax year 2024.

What’s changing with R&D tax credit reporting?

Increased documentation requirements for R&D tax credits started to swell in late 2021 when the IRS announced new procedures for R&D refund claims on amended tax returns. This was viewed by many as the agency’s opening salvo to ferret out erroneous and aggressive R&D tax credit claims through heightened pre-audit documentation. Following this shift, changes to Form 6765 to reflect enhanced documentation procedures for current year claims were all but assured.

The IRS first proposed changes to Form 6765 in September 2023 when it also sought comments from taxpayers. A revised form was then released in June 2024. While the new draft form walked back some of the more onerous requirements from round one, it still represents a fundamental change in how taxpayers must document and report their R&D credits from a qualitative and quantitative perspective.

New Section G reporting

The most notable addition to Form 6765 is Section G, which requires several categories of info pertaining to the taxpayer’s business components (i.e., the products, processes, etc. for which the credit is being claimed). These include:

• The name or identifier of the business component;
• Business component type;
• Description of the information sought to be discovered with respect to each business component;
• The amount of direct research, supervision, and support wages for each business component; and
• The amount of supply, leased computing, and contract research expense for each business component.

In response to feedback, the IRS reduced the number of business components that must be reported on Section G. As currently proposed, taxpayers should report 80% of their total qualified research expenses (QREs) in descending order per business component, but no more than 50 business components in total. However, taxpayers will need to list the total number of business components being claimed on Line 37 of Section E.

Section G transitional relief and exemptions

Section G will be optional for all filers for tax year 2024. The IRS says this will allow taxpayers time to transition to the Section G format. Thereafter, the new section will be mandatory, except in limited circumstances.

To reduce administrative burdens for certain taxpayers, the IRS will exempt the following from Section G reporting:

• Qualified small business taxpayers (defined under IRC Section 41(h)(1)&(2)) making a payroll credit election for their R&D tax credit, and
• Taxpayers that have (i) total QREs not exceeding $1.5 million, (ii) gross receipts not exceeding $50 million, and (iii) claimed their R&D credit on an originally filed return.

Other changes

Other important additions and questions on the draft form include:

• A separate line item specifically for officer wages being claimed,
• Whether the taxpayer acquired or disposed of a major portion of a trade or business during the tax year, and
• Whether any portion of QREs were determined using the IRS ASC 730 Directive.

What’s next with R&D tax credit reporting and how to prepare?

Although the current changes are still in proposed form, the IRS is expected to finalize them before the start of the upcoming tax year 2024 filing season. Additionally, the IRS will need to issue revised instructions for Form 6765 to reflect the new changes.

Section G will require the most effort to complete for taxpayers subject to it. For companies that choose not complete Section G for tax year 2024, they should plan for the changes and begin compiling the required information since it’ll be mandatory for tax year 2025. While the increased reporting obligations on Form 6765 are new and will surely require additional time to comply with, such information should always be part of a well-documented R&D tax credit study.

How CLA can help with R&D tax credit reporting

CLA’s R&D Tax team works with companies of all sizes to document and claim their R&D tax credits. Contact your CLA professional to learn how we can assist you navigate and implement the new Form 6765 reporting requirements while enhancing your overall credit benefit.

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