The Internal Revenue Service (IRS) is preparing taxpayers to provide more qualitative and costing information with IRC Section 41 Research Credit calculations on an originally filed tax return. On December 20, 2024, the IRS released IR 2024-313, which summarizes the draft updated Form 6765 and its draft instructions. An updated draft of Form 6765 was also made available on December 12, 2024, following the initial draft released on June 21, 2024.
New Qualitative Data Requirements for Form 6765
Historically, Form 6765 has been used primarily for reporting quantitative data, with qualitative documentation kept mainly for potential IRS audits. The revised Form 6765 now mandates the inclusion of significantly more qualitative data directly with the tax return. The IRS has invited taxpayers and clients to provide feedback on the following items through June 30, 2025:
- Section G Business Component information reporting for controlled groups
- Accounting Standards Codification (ASC) 730 Research & Development (R&D) Directive
- Section G Business Component detail
- Statistical sampling
Summary of Changes
Section E — Other Information
The latest version of Form 6765 retains the same Section E as the draft released in June 2024. This section requires taxpayers to disclose:
- Total number of business components generating qualified research expenses (QREs)
- Total amount of officers’ wages included as wage QREs
- Any acquisitions or dispositions of major trade/businesses during the tax year
- Any new categories of QREs identified in the tax year that were previously not claimed (e.g., wages, supplies, contract research, or computer cloud hosting)
- Whether any QREs are being safe harbored under the ASC 730 directive
Section G — Business Component Information
Section G is optional for all tax years beginning before January 1, 2025, but will be required for tax years beginning after December 31, 2024. Taxpayers exempt from completing Section G include:
- Qualified small business (QSB) taxpayers, as defined under IRC Section 41(h)(1) & (2), who opt to claim a reduced payroll tax credit; or
- Taxpayers with total QREs equal to or less than $1.5 million, determined at the controlled group level and with $50 million or less in gross receipts, claiming a research credit on an originally filed return.
Taxpayers not meeting these exceptions will need to report additional items, such as:
- Identify all business components that account for 80% of QREs or list the top 50 business components (80%/Top50).
- Specify the information that is being sought for discovery.
- Break down the total amount of qualified wages into categories of direct performance, direct supervision and direct support of qualified research activities.
- Provide additional details in attachments for claims that involve statistical sampling or are filed on amended returns.
Understanding the New Requirements
The updated Form 6765 introduces significant changes that will impact how taxpayers report their R&D activities. Among these changes is the introduction of business component-level reporting by name and type. This is along with the requirement to attach statistical sampling plans, will prompt taxpayers to proactively assess their readiness for compliance deadlines. By providing this detailed information at the time of filing, the IRS will be better positioned to evaluate the quality of the tax credit claim before determining if further inquiry is necessary.
Preparing for 2025 Compliance
While most taxpayers may not need to complete the complex Section G for the 2024 tax year, it is crucial to start gathering the necessary data now in preparation for the 2025 tax year. These new requirements will demand a significant increase in the amount of data collected and analyzed for research credit calculations, and completing Form 6765, along with the required attachments, will take considerably more time due to the increased reporting demands.
Taxpayers should review their current approaches, including the use of statistical sampling and the potential for claiming QREs under ASC 730, if eligible. The upcoming changes necessitate careful planning and updates to current research credit claim processes.
Your Guide Forward
Cherry Bekaert's R&D Tax Credits team is ready to help you navigate these updates. Our tax advisors can help maintain compliance with the new standards and optimize your research credit claims. Reach out to Cherry Bekaert today to partner with a trusted advisor who can guide you through these changes, allowing you to focus on innovation and growth.
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