The requirements for the Credit for Increasing Research Activities (R&D Tax Credit) continue to evolve. The IRS has issued a second proposed revision of Form 6765 following a public comment period in 2023 on the initial draft. This proposed 6765 draft was published three days after the IRS relaxed reporting requirements for refund claims filed after June 18, 2024. The proposed new form deviates from 30 years of historical reporting by requiring taxpayers to provide qualitative information about their research activities at the time the credit is claimed rather than retain such information in case of an IRS inquiry.

What is changing?

The new form expands the current format from 2 pages to 4 pages, plus supplemental attachments, effectively reorganizing the form into seven sections with varying levels of detail and summaries breaking out types of costs by entities and business components. It also asks the taxpayer to identify whether the filing includes any exceptions that would affect the calculation, including, but not limited to:

1. Business acquisitions or dispositions;
2. New categories of expenditures;
3. ASC 730 calculations;
4. 280C elections; and
5. The presence of common control across multiple entities or a Qualified Small Business (QSB) claiming the payroll credit under a separate EIN.

More qualitative detail

The most significant departure from prior years’ reporting is the requirement that taxpayers identify and explain the business components upon which the tax credit is based. Business components are projects or groups of projects that create economic nexus for qualified activities. Recent case law has increasingly shown that the IRS may disallow the tax credit if a taxpayer fails to appropriately substantiate the credit with business components (Siemer Milling Co. v. Commissioner; Little Sandy Coal Company, Inc. v. Commissioner). Additionally, the form requires taxpayers to itemize direct wages, supervisory wages, and support wages by business component and identify officer compensation included in the calculation.

Taxpayers must disclose 80% of their Qualified Research Expenditures (QREs) by business component, beginning with the most expensive business components, up to 50 disclosures. ASC 730 QREs are essentially treated as a single business component. Business component detail is optional for QSBs claiming the payroll tax credit or taxpayers and controlled groups with QREs and gross receipts below $1.5 million and $50 million, respectively.

What does CohnReznick think?

While the requirement to document qualitative information for the R&D Tax Credit has always existed, the requirement to furnish that information proactively is unprecedented. Businesses should review their tax credit compliance now to confirm that it aligns with the pending Form 6765 updates. 

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