The IRS is proposing a new Form 6765 for the tax year 2024 that includes the addition of two new sections as well as a requirement that taxpayers submit their original R&D calculation with  Qualified Research Expenses (QREs) broken down by project or business component. These changes benefit taxpayers in numerous ways. Read on.

By Mark Dunning

The recently proposed changes to the Internal Revenue Service (IRS) Form 6765 for the tax year 2024 will mean some significant changes for taxpayers. These changes include the addition of two new sections and the requirement to break down Qualified Research Expenses (QREs) by project or business component. These changes support audit readiness and level the playing field by requiring all tax preparers to adhere to the higher standard of work that TaxOps Minimization has been providing its clients for years (and years).

Background

The new Form 6765 introduces substantial changes aimed at improving the accuracy and transparency of research activities and expenses. These changes will have implications on tax returns filed for the tax year 2024 and beyond.

The new Form 6765 introduces two entirely new sections – Sections E and F – to align the new Form with what the IRS has been asking in R&D credit examinations for years and what the IRS has been trying to require for any R&D credit refund claims (amended returns) since 2021, as seen in a number of IRS Interim Guidance sources including a Chief Counsel Memorandum and a few IRS Press Releases (see Read More below).

Section E asks some specific questions regarding the number of business components, officers being included in qualified wages, current year acquisition and dispositions, new expense categories, and the use of ASC 730 for QRE determinations. Section F requires taxpayers to report quantitative and qualitative information for each business component.

By requiring a breakdown of business components and QREs by project or business component, the IRS is expecting greater accuracy and transparency in reporting on the R&D activities undertaken by businesses, thereby allowing for better assessment of credit eligibility. While these changes may seem daunting to some tax preparers, they are ultimately in the best interest of taxpayers.

By enforcing these requirements, the IRS is striving to hold preparers accountable and ensure that the necessary work is done to accurately report R&D activities. This means that taxpayers can rest assured that their claims are properly supported, reducing the risk of audit issues down the line.

The new form also shifts the layout, placing key elections related to the R&D credit at the top for easier visibility. In Section A, line 17 identifies the “reduced credit” election under section 280C while Section B identifies the “member of a controlled group or business under common control.” This layout change is intended to streamline the process for both the IRS and taxpayers, making it easier to identify and understand election choices relating to the credit.

Greater Enforcement

§41 has always required that activities be delineated by project or business component. The IRS Research Credit Claims Audit Techniques Guide issued in May 2008 includes an information document request template requiring the taxpayer to supply each business component during the period and QREs for each component.

The new Form 6765, with its requirements for breaking down QREs by business component, ensures that all preparers adhere to the same standards. This not only benefits the IRS but also protects taxpayers by ensuring that the documentation received from tax providers is accurate and thorough.

From a taxpayer’s perspective, the new Form 6765 should weed out bad actors by penalizing, through enforcement, those CPA firms who do not do the required work upfront. The changes also encourage businesses to do their due diligence and verify that their research activities are correctly broken down by their tax preparer. By doing so, taxpayers become audit-ready and minimize the risk of issues arising during IRS examinations. This level of detail also helps businesses better understand their R&D efforts, allowing them to make informed decisions and potentially uncover areas for improvement or expanding the credit.

Additionally, this change highlights the importance of working with tax preparers who are familiar with Section 41 and the intricacies of the R&D credit, including nexus generating activities and IRS expectations.

AICPA Comments

The AICPA submitted a comment letter to the IRS on October 30, 2023, recognizing the administrative burden these changes will have on all taxpayers and especially small taxpayers. “Additionally, the new requirements may deter many taxpayers from claiming the credit as the time and cost to comply will significantly reduce the benefit of the taxpayer in claiming the credit,” writes the AICPA.

The AICPA recommendations include clarifying the proposed changes to Section E to consider multitude of taxpayer fact patterns to gather data to risk assess credit claim, informing higher quality outputs; modifying Section F for fewer target questions; and clarifying instruction related to Section E and Section F for taxpayers that use statistical sampling to determine QREs.

The Takeaway

The new Form 6765 for tax year 2024 brings significant changes to how research activities and expenses are reported. These changes are effective for the 2024 tax year impacting tax filings completed in 2025. Contact your TaxOps Min advisor with questions.

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