On September 15, 2023, the Internal Revenue Service (IRS) released proposed changes to Form 6765, Credit for Increasing Research Activities, and requested feedback, which is due by October 31, 2023. The proposed updates to Form 6765 require information like that which is required when submitting amended returns. See the Chief Counsel Memorandum issued September 17, 2021. If adopted, these new rules, combined with the specified research expenditure capitalization rules from 2022, will change the nature of how research and development (R&D) studies are conducted by standardizing some of the taxpayer information reviewed by the IRS upon submission of an R&D tax credit. Proposed changes include:
- Moving questions related to electing the reduced credit under Section 280C and whether the taxpayer is a member of a controlled group to a more prominent position on the form
- Adding a section requesting miscellaneous information
- Adding a section requesting costing and qualitative information, including identifying and allocating costs to business components
The IRS requested comments on the costing and qualitative information requirement described above on the possibility of making it optional based on certain criteria. The following examples are of criteria that may exempt a taxpayer from adhering to this requirement:
- QRE Minimum Threshold: For taxpayers with qualified research expenditures (QREs) under a certain dollar amount, including total QREs for controlled groups
- Credit Minimum Threshold: With research credits under a certain dollar amount, including at the controlled group level
- Start-Up Exemption: Not requiring the information for qualified small businesses as defined under Section 41(h)
Section E – Other Information
The service is proposing requesting information in the following areas:
- Number of business components for the tax year
- Total Officer’s Wages included as QREs
- Why acquisitions or dispositions of major trades or businesses were made during the tax year
- Any new categories of QREs were included in the current calculation for taxpayers with a history of claiming credits in past years
- Whether the taxpayer used the ASC 730 Directive to identify any QREs for the tax year
Section F – Business Component Information
Section F is the more interesting of the sections. It is comprised of sections requesting information in a tabular format that describes the taxpayers’ project and business components and their associated costs:
- Business Component Information:
- Line 50(a): Federal Employer Identification Number (FEIN) for each controlled group member for each business component
- Line 50(b): Principal business activity code for each controlled group member and business component
- Line 50(c): The business component’s descriptive name
- Line 50(d): The information sought to be discovered and the identifications of alternatives evaluated during the process of experimentation for each business component
- Line 50(e): Is the business component a new or improved component?
- Line 50(f): What is the type of business component? Answers are limited to the following responses:
- Product
- Process
- Computer software
- Technique
- Formula
- Invention
- Line 50(g): Business component use? Answers are limited to the following responses:
- Sale
- Lease
- License
- Used in the taxpayer’s trade or business
- Line 50(h): Information about software, if applicable. Answers are limited to the following responses for each software business component:
- Internal Use Software (IUS)
- Dual Function Software (DFS)
- DFS, third party subset(s) – IUS with a subset subject to the High Threshold of Innovation Test
- DFS, dual function software for which the dual function safe harbor, 25% of the expenditures that meet all conditions for software qualification, is applied
- 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 general and administrative (G&A) functions
- Non-IUS developed to interact with third parties but not to be used in any G&A functions of the taxpayer
- IUS exempted due to use in an activity that constitutes qualified research
- IUS exempted due to use in an activity in a production process to which the requirements of Section 41(d)(1) are met
- Embedded software
- QRE detail by business component
- Line 51: Wages for direct qualified research activity (QA).
- Line 52: Wages for the direct supervision of QA
- Line 53: Wages for the direct support of QA
- Line 54: Total Qualified Wages
- Line 55: Cost of Supplies
- Line 56: Lease or use of computers
- Line 57: Contract research expenses
- The inclusion of the information listed above will likely change the method by which taxpayers and consultants identify and document QREs during an R&D tax credit study. Taxpayers and service providers will undoubtedly have comments on the form and content of the required information.
Let Us Guide You Forward
Reach out to Cherry Bekaert’s Tax Credits and Incentives Advisory team if you have any questions about your eligibility for R&D tax credits and how to apply.
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