Upcoming Changes to Form 6765: What Taxpayers Need to Know for 2024 and Beyond
The Internal Revenue Service (IRS) is proposing revisions to Form 6765 which pertains to the Research and Development (R&D) tax credits. These changes, set to be effective for tax year 2024 onwards, aim to capture more qualitative information, thereby potentially impacting how taxpayers approach their filings.
Let’s delve into the specifics of these proposed changes.
New Additions
PRE-SECTION A ADDITIONS
- The form will introduce two preliminary questions prior to Section A. Of these, one is entirely new and aims to gather details about whether the organization belongs to a controlled group or is under common control.
INTRODUCTION OF SECTION E
- It will inquire about the number of Business Components (BCs).
- The section will gather information on officer compensation.
- It seeks to understand acquisitions and dispositions.
- It will inquire if there are any new categories of Qualified Research Expenditures (QREs). If the answer is affirmative, the IRS expects taxpayers to update the base to incorporate these categories.
- It will ask about the use of ASC 730 Directive – but this can only be utilized by taxpayers whose assets are equal to or surpass the $10M mark.
INTRODUCTION OF SECTION F
- This section seems inspired by the CCA memo but comes with added granularity.
- Taxpayers need to clarify if a BC is new or improved
- The exact type of BC must be identified, whether it’s a product, process, formula, invention, software, or technique.
- There’s an option to define the “business component use” such as sale, lease, license, or its utilization in a trade or business.
- This section requires a detailed breakdown of wages between direct research, supervision, and support.
- For software-inclusive BCs, taxpayers need to distinguish between various types, such as:
- Internal use software (IUS)
- Dual function software (DFS) – no third-party subset identified, dual function software safe harbor not applied
- DFS – third-party subset(s) identified (with the remaining dual function subset subject to High Threshold of Innovation test)
- DFS–dual function software safe harbor applied (25% of expenditures that meet all conditions)
- Non-IUS–developed to be commercially sold, leased, licensed, or otherwise marketed to third parties
- Non-IUS–developed to be used internally by the taxpayer but not in any G&A (general & administrative) function(s) of the taxpayer
- Non-IUS–developed to interact with third parties but not to be used in any G&A function(s) of the taxpayer
- Excepted from IUS Treatment–developed for internal use by the taxpayer for use in a production process to which the requirements of section 41(d)(1) are met
- Excepted from IUS Treatment–A new or improved package of software and hardware developed together by the taxpayer as a single product (or to the costs to modify an acquired software and hardware package), of which the software is an integral part, that is used directly by the taxpayer in providing services in its trade or business. In these cases, eligibility for the research credit is to be determined by examining the combined hardware- software product as a single product.
Takeaways and Implications
The IRS’s proposed alterations to Form 6765 align with changes made in 2022, concerning amended returns for R&D credit refunds. As tax year 2024 approaches, many taxpayers may be caught off guard by both the requirement to categorize costs by business component and the need to have this data complete at the time of filing.
This adjustment underscores the importance of ensuring R&D service providers furnish comprehensive documentation timely, especially given that many currently exclude business component descriptions and 4-part test discussions from their final reports.
Source Advisors has been at the forefront of data accumulation and documentation in this area, positioning us as a valuable ally for clients navigating these changes. To ensure a seamless transition, taxpayers are advised to stay updated on these shifts and consider partnering with seasoned experts in the field.
