New for tax year 2024, the IRS has modified Form 6765 to include qualitative information related to taxpayers’ technical endeavors. The expansion of the form to include project details augments the information historically required to file an R&D credit claim. Taxpayers must now identify business components, related costs, and technical unknowns. 

Section E

Form 6765 now requests qualitative information that has not previously required in the 40-year history of the credit. For example, Section E specifically requests the amount of officer wages included in the claim. The court’s decision in Moore v. Commissioner highlights the importance of substantiating and properly documenting officer wages. In this case, the lack of written records and inability to estimate an officer’s time spent on research led the court to exclude the officer’s wages from the credit. Equally important, in Section E taxpayers must also provide the number of business components generating qualified research expenditures (QREs). A business component is any product, process, software, technique, formula, or invention held for sale, lease, license, or used in a trade or business. 

The updated Section E also has taxpayers indicate if their QREs were determined under the ASC 730 Directive. This directive allows qualified taxpayers to use the R&D costs as reported on their financial statements, subject to adjustments, to calculate the R&D credit. Additionally, Section E inquires about any acquisitions or dispositions made during the tax year, which can indicate the need for adjusted calculations. Stock and asset acquisitions and dispositions are scrutinized differently when calculating the credit and should be accounted for each year a credit is claimed. 

Section G

The updated Form 6765’s Section G requires that the taxpayer identify each business component by name and type, as well as separately allocate wages for conducting, supervising, or supporting research. This update follows several recent IRS victories including Little Sandy Coal v. Commissioner and Siemer Milling Co. v. Commissioner wherein the taxpayers failed to adequately allocate costs across clearly defined business components. Thanks, in part, to these recent cases, the IRS has newfound support to disallow credit studies that fail to substantiate the eligibility of Qualified Research Activities (QRAs). For example, 80% of a taxpayer’s QRAs for a given business component must constitute elements of a process of experimentation to qualify for the credit. Section G will allow the IRS to analyze this issue at the time the tax return is filed for indications of a deficient analysis.

While Section G is optional for taxpayers with total QREs of less than $1.5 million at the controlled group level and gross receipts of less than $50 million, the IRS will still likely expect taxpayers to maintain a comparable level of recordkeeping under examination. The Section G business component reporting requirement (a 2025 requirement) extends to 80% of QREs in descending order not to exceed 50 business components; however, taxpayers are still expected to comprehensively identify the numbers of business components in Section E (a 2024 requirement). The disclosures in the tax return lay out the framework on which the credit claim is based and may create additional administrative precedent to disallow a credit should a taxpayer fail to adhere to this framework.

What does CohnReznick think?

New R&D credit compliance phases in over 2024 and 2025. This means taxpayers will need to aggregate comprehensive details about their research expenses by business component. Given the unprecedented nature of these changes, questions are likely to arise. Now is the time to make sure qualitative information is timely and adequately collected and disclosed to support any research credit claims.

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