Changes to Claiming the R&D Tax Credit on Original Returns

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Internal Revenue Service BuildingThe IRS recently published the draft version of IRS Form 6765 for filing the R&D Tax Credit. The original draft form included additional information to submit when filing original tax returns. The revised draft appears to incorporate several of the comments received and is designed to reduce taxpayer burden and optimize the information requested in the filing. Section E is mandatory for everyone beginning tax year 2024, whereas Section G is optional but will be mandatory for certain taxpayers in 2025.

On a high level, Section G requires taxpayers to report details for projects making up 80% of Qualified Research Expenses (QREs) but no more than 50 total business components by research expenditure. Stay tuned for more on the Section G reporting requirements in an upcoming article. Section F is designed to help determine if Section G needs to be completed. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key changes and details below to determine if you will be required to fill out Section G and breaks down each field that needs to be reported in Section E.

Form 6765 Changes Proposed:

Section G:

  • Optional for tax year 2024 for all taxpayers.
  • Mandatory for tax year 2025 for certain taxpayers.
    • For taxpayers with more than 1.5 M in research expenditures.
    • OR greater than 50 million in gross receipts.
  • Optional for QSBs who check the box to claim reduced payroll credit.

As a refresher, qualified small businesses (“QSBs”) are taxpayers that meet the following requirements:

  • Must have gross receipts of less than $5 million in the current tax year.
  • Cannot have gross receipts prior to a 5-year look back period, including the current year. Thus, if the current taxable year is 2024, the look-back period would be 2020 through 2024.

In determining the gross receipts, all gross receipts from an individual’s trade or businesses must be aggregated. The same applies to related entities; the entire affiliate group’s gross receipts must total under the $5M threshold. Also, gross receipts include more than just box 1 – other income, royalties, interest income, etc., would also apply.

Section F in the most recent draft form aids taxpayers in determining if they must complete Section G.

What is required for tax year 2024?

Section E is mandatory for ALL taxpayers. JLK Rosenberger breaks down what is required for Section E in more detail below:

Number of Business Components generating the qualified research expenditures (“QREs”):

The “Business Component” includes:

  • A listing of projects – number and name, if applicable that the QREs apply to and
  • The IRC Section 41(D)(2)(B) defined business component (i.e., product, process, formulation, technique, invention, or software) sought to achieve in each project

Amount of QREs contributed by officer wages:

This one is more straightforward, and it is the amount of QREs generated by officers or executives of the business.

If your company acquired or disposed of any portion of the trade or business:

This field seems to be addressing the consistency requirement that mandates that the costs and activities included in the current year must be consistent with the base period used in the calculations. For instance, if you acquired a company that previously conducted R&D activities, that company’s activities for the employees acquired need to be accounted for in the base period if included in the current year’s calculations.

If there are any new categories of QREs being reported:

As a refresher, taxpayers can claim a portion of employee wages, certain supplies and contractor expenditures, and cloud/computer lease/rentals for activities that meet the four-part test. This field also seems to be making sure that costs included in the current year are consistent with what was claimed in the base period, which varies depending on which calculation methodology you are using.

Did you determine any of the QREs on line 5 or 20 following the ASC 730 Directive:

Per the draft Form 6765 instructions, the ASC 730 directive can only be used by taxpayers:

  • With equal to or more than $10 million in assets; and
  • Follow U.S. GAAP (Generally Accepted Accounting Principles) in preparing Certified Audited Financial Statements that report the amount of expensed R&D costs on the financial statement.
We’re here to help

The recently published draft copy of IRS Form 6765 provides insight into the efforts the agency is making to simplify reporting complexity. While additional changes are likely forthcoming, it is important to be aware of how the updates may impact your filing situation. If you have questions about the information outlined above or need assistance claiming your next federal R&D credit, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.