Article | by Alex J. Bazor & Aaron Lee

               Businesses that claim the Research tax credit this year will see a revised and expanded form. In December, the IRS released a draft revised form 6765 and instructions, which included new required sections with additional detail. The new form will require Taxpayers claiming the R&D credit to report additional information beginning with the 2024 tax year. Some important changes to note for the revised form are the addition of Sections E, F, and G.

Section E

                Section E, Other Information, provides additional details or information about the qualifying amount of business components used, amount of officers’ wages included in the credit claim, and whether the Taxpayer acquired or disposed of any major portion of their trade or business in the reporting tax year for the credit claim. Business component(s), defined by law, is any product, process, computer software, technique, formula, or invention which is to be held for sale, leased, licensed, or used by taxpayers in their trade or business. The section also asks whether the Taxpayer is applying the ASC 730 directive. The directive was first issued by the Large Business & International (LB&I) Division in 2017 and applies to taxpayers with Certified Audited Financial Statements and total assets of $10 million or more. The directive serves to create a bridge between GAAP and tax for reporting research and development costs.

Section F

Section F, Qualified Research Expenses Summary, summarizes all business components that qualify in determining the research credit claim. These components include total wages for qualified services for business components excluding any wages in figuring work opportunity credit, total rental or leases, and total cost of supplies for all business components used in determination of qualified research expenses. The Section will be completed differently depending on whether the Taxpayer is required to complete Section G.

Section G

                Section G, Business Component Information, will require taxpayers to provide detailed information related to business components and associated qualifying research costs to claim research credit. Section G will be optional for all taxpayers for tax year 2024. After tax year 2024, Section G will be mandatory unless a taxpayer satisfies one of the two exceptions:

• •          You are a Qualified Small Business, as defined under section 41(h)(1) and (2), and you checked the box to claim a reduced payroll tax credit; or
  •          Your total Qualified Research Expenses (QREs) on line 48 are equal to or less than $1.5 million, determined at the control group level, and your gross receipts are equal to or less than $50 million of gross receipts, as determined under section 448(c)(3) (without regard to subparagraph (A) thereof), and you are reporting a research credit on an original filed return.

Conclusion

The revisions contained in the draft Form 6765 signal a heightened interest from the Internal Revenue Service when determining which claims to examine. The new sections focus on identifying which business components qualify for the credit. This is seemingly a direct result of recent court cases Little Sandy Coal Company, Inc. v. Commissioner of Internal Revenue, No. 21-3145 (7th Cir. 2023) and Leonard L. Grigsby et al. v. The United States, No. 22-30764 (5th Cir. 2023) which focused on the Taxpayers’ business components. The R&D credit is a great incentive for many taxpayers to fuel innovation. However, claiming the credit will now require additional costs and time to ensure compliance with the revised form 6765. The IRS anticipates publishing the final tax year 2024 Form 6765 and Instructions by the end of January 2025. Be sure to reach out to us if any of these changes affect you or you have questions regarding the new reporting requirements.

Geffen Mesher’s team is available to assist you with questions related to these updated rules. To learn more, please reach out to Alex J. Bazor at abazor@gmco.com or Aaron Lee at alee@gmco.com.