IRS releases proposed Form 6765 changes for 2024

On Sept. 15, the IRS released a preview of the proposed changes to Form 6765. Taxpayers attach Form 6765 to an original or amended income tax return to report qualifying research expenditures (QREs) and their claim for a R&E credit.

The changes are proposed for the 2024 tax year and will require extensive additional quantitative and qualitative information to support a taxpayer’s identified QREs.

Summary of the changes

The following is a summary of the major changes being proposed for the 2024 Form 6765:

• The top of the form now includes questions about the reduced credit, otherwise known as the Section 280C election, and controlled groups or businesses under common control.
• A new Section E has been added with the following fields:
  • Number of business components generating the credit
  • Amount of officers’ wages included in QREs
  • Yes/no questions around whether the taxpayer:
    • Acquired or disposed of a major portion of a trade or business
    • Identified any new categories of expenditures in the current year not included in the base year
    • Determined any of the QREs following the ASC 730 directive
• A new Section F has been added, which requires taxpayers to provide the following information, which in many cases would require attaching burdensome and lengthy submissions to the form filed with the return:
  • Controlled group member’s name, employee identification number, and principal business activity code
  • For each business component:
    • A description of the information sought to be discovered and the alternatives evaluated in the process of experimentation (using space provided).
    • Whether the business component was new or improved.
    • Business component type (product, process, computer software, technique, formula, or invention).
    • Business component use (sale, lease, license, or used by the taxpayer).
    • Software type, if applicable. There are 10 choices, including internal use, dual function, noninternal use, and exempt from internal use.
    • A breakdown of QREs for each business component by direct research wages, direct supervision wages, direct support wages, supplies, and contract research expenses.

The instructions for Section F require taxpayers identifying QREs within the ASC 730 directive to report their computed adjusted ASC 730 financial statement research and development QRE amounts as a single business component. Any additional QREs must be reported for each business component separately under Section F.

Crowe observation

These proposed changes likely would require taxpayers to change the methodology employed to identify and document QREs, as the form changes require a significant amount of very detailed quantitative and qualitative information at each business component level.

IRS request for comments

On its website, the IRS states that the purpose of the proposed form changes is to provide effective tax administration and to help taxpayers understand what is required to support claiming the R&E credit. However, the proposed changes would impose a significant burden and cost on taxpayers and could discourage taxpayers that otherwise are entitled from claiming the credit. The expected burden could be especially true for small businesses, which are precisely the taxpayers that are least likely to understand the full extent of the credits to which they are entitled and that might be most disincentivized to claim the credit because of the burden and cost associated with the proposed changes.

The IRS has requested feedback on the proposed changes by Oct. 31. The IRS also specifically has asked for feedback on whether Section F should be optional if QREs are less than a certain dollar amount at a controlled-group level, if the research credit being claimed is less than a certain dollar amount at a controlled-group level, or if the taxpayer is a qualified small business eligible to claim the payroll tax credit.

Looking ahead

It is unclear whether changes to Form 6765 will be adopted as proposed, not adopted, or adopted with modifications. In any event, the proposed changes provide insight into how the IRS views the R&E credit and are a continuation of the changes implemented last year that require taxpayers to submit similarly burdensome information with R&E credit refund claims filed on an amended return. To be prepared for changes in the IRS’ compliance efforts around the R&E credits, taxpayers should consult their tax advisers to evaluate what impact the proposed form changes could have on their evaluation, identification, and documentation of the research credit and the timing that would be needed to complete the required information.