Be prepared: IRS announces revisions to previously-proposed R&D Tax Credit form

Background: IRS seeks more qualitative information

On September 15, 2023, the IRS proposed numerous burdensome additions to the documentation requirements for taxpayers claiming the Research Credit on timely-filed original returns (Form 6765).

One proposed change in particular, “the narrative requirement”, would have significantly increased the qualitative information required to be submitted to the IRS, like a description of all research activities performed on each R&D project, and the information sought to be discovered through the conduct of those activities.

IRS revises changes proposed in 2023

On June 21st, the IRS announced taxpayer-friendly revisions to the previously-proposed changes. The new requirements are set to take effect for tax year 2024 (processing year 2025).

The biggest takeaway from June’s revisions

Per the June press release, taxpayers filing for the R&D credit on timely-filed original returns will not be required to include a narrative describing the information sought to be discovered through the research activities performed on each business component (or, R&D project). 

Many taxpayers and tax advisors agree this was perhaps the most burdensome documentation requirement the IRS included in its original proposed changes to the tax form.See below for a high-level summary of the rest of the revisions announced on June 21st.

Important to note: the changes below will be optional for all taxpayers for the 2024 tax year (processing year 2025). The changes below represent those that are set to take effect in tax year 2025 (processing year 2026).

New requirements will be optional for certain small businesses

When the new reporting requirements take effect in tax year 2025 they will remain optional for the following filers:

• Qualified Small Businesses (QSBs) electing the reduced credit.
• For taxpayers with QRE less than or equal to $1.5 million (at the control-group level) AND less than or equal to $50 million in Gross Receipts.

Summary of IRS’ revisions

Below is a summary of the revisions announced in June 2024:

• Taxpayers should list their business components in descending order by QRE per business component for up to 80% of their total QRE (up to a maximum of 50 business components listed).
• Taxpayers will not be required to identify whether a business component is new or improved.
• Taxpayers will not be required to identify whether the business component is for sale, license, or lease.
• Taxpayers will not be required to provide the "narrative" describing the information sought to be discovered. That is, the research activities performed on each business component and their intended objectives.
• The IRS also announced the selections were reduced for identifying the type of each business component. However, they did not include the revised list of selection options.

Additionally, the IRS announcement mentioned that the definitions for officers, controlled-group reporting, and business component descriptive names will be clarified in the Form 6765 instructions "at a later date".

These changes will be optional for all filers for 2024, then take effect (for taxpayers to whom they apply) for tax year 2025.

Changes to the layout of Form 6765

• Moved the QRE summary from the previous Section A or B (depending on credit calculation method) to Section F "Qualified Research Expenses Summary".
• For taxpayers required to complete Section G (i.e. not the certain small businesses described above) QRE will be required to be reported by business component.
• Within each business component:
  • Wage QRE will now need to be broken down by wages for:
    • Direct research
    • Direct supervision
    • Direct support
  • Supplies QRE
  • Rental or lease cost of computers QRE
  • Contract research QRE
• No qualitative information will be required other than the business component's name (i.e. no narrative requirement; no research activity descriptions).

Changes to Amended Returns Claims

Separately, on June 18th, the IRS reduced the reporting requirements for amended return claims (refund claims) involving the Research Credit. Taxpayers claiming the Research Credit on amended returns will no longer be required to provide the below items, which many stakeholders felt were far too burdensome for taxpayers:

1. The names of the individuals who performed each research activity, and
2. The information each individual sought to discover.

Conclusion

The IRS has been busy! Each of these revisions were the result of comments and feedback the IRS solicited when it announced its original set of proposed changes to Form 6765 in the fall of 2023. Taxpayers and tax advisors alike view the elimination of the proposed narrative requirement as a huge victory resulting from the nearly year-long feedback period.

The IRS noted that while these changes should alleviate the burden on taxpayers claiming the credit, it remains a best practice to record this information during a research credit study, because the IRS may require it if your Research Credit claim is audited.

Get in touch with us today to see how TaxCredit.ai can help your business leverage its engineering data and our compartmentalized generative AI platform to assist you in completing your R&D Tax Credit Study.