IRS Proposes Changes to Form 6765 for R&D Tax Credits: What You Need to Know  

The IRS has proposed significant changes to Form 6765, which is used to claim R&D tax credits, with new requirements set to take effect for tax year 2024. These revisions aim to enhance qualitative reporting and may significantly impact how taxpayers file for the credit. The latest draft version of the form was published on December 12, 2024.

Key Changes to Form 6765

Preliminary Questions Before Section A

Before completing Section A, taxpayers must now answer two key questions:

1. Controlled Group Status: Determine whether the organization is part of a controlled group or under common control.
2. 280C Election Box: Indicating whether the taxpayer is electing the reduced 280C credit.

New Additions: Section E, F, and G

Introduction of Section E – Other Information

Taxpayers must now provide additional details regarding:

• Number of Business Components (BCs) used in the credit calculation.
• Officer Compensation, which may relate to qualified research expenditures (QREs).
• Acquisitions and Dispositions that may impact the R&D credit calculation.
• New Categories of Expenditures added to the current year’s QREs.
• Use of the ASC 730 Directive for companies with assets over $10 million.

Introduction of Section F – Qualified Research Expenses (QREs) Summary

This section requires taxpayers to:

• Indicate whether they are required to complete Section G.
• Provide a breakdown of QREs by type, offering greater transparency into qualified R&D activities.

Introduction of Section G – Business Component Information

Mandatory vs. Optional Reporting

• 2024: Completion of Section G is optional for all taxpayers.
• 2025: Section G will only remain optional for:
  • Qualified Small Businesses (QSBs) claiming the payroll credit.
  • Taxpayers with QREs of $1.5M or less (determined at the controlled group level) and gross receipts of $50M or less while claiming the research credit on an original filed return.

New Reporting Requirements in Section G

• 80% of Total QREs: Must be reported in descending order by amount per business component (limited to a maximum of 50 business components).
• Identification of Business Components:
  Each must be categorized by:
  • Company name
  • Type (e.g., product, process, formula, invention, software, or technique).

Special Treatment for Software R&D

Taxpayers developing software must distinguish business components into:

• Internal Use Software (IUS)
• Dual Function Software (DFS)
• Non-IUS (for commercial sale, internal use, or third-party interaction).
• Exceptions from IUS Treatment.

Additional granular reporting is required, including:

• Details on information sought to be discovered.
• Wage breakdowns by three qualified levels per business component.
• Supplies, rental/lease costs of computers, and qualified contract amounts categorized by business component.

Implications for Taxpayers

These changes indicate a stronger IRS focus on qualitative R&D information, potentially leading to greater scrutiny of claims. The new requirements may increase administrative burdens for businesses, especially those with complex R&D activities.

Companies seeking to claim the R&D tax credit should:

• Review the new reporting sections to prepare for 2024.
• Ensure proper documentation of R&D activities and expenditures.
• Work with tax professionals to assess the impact of these changes on their filings.

Final Thoughts

The IRS’s proposed updates to Form 6765 reflect a shift toward greater transparency and compliance through increased documentation reporting in R&D tax credit claims. Businesses should proactively adjust their documentation and filing processes to meet these new reporting requirements, especially as Section G becomes mandatory for most taxpayers in 2025.