The IRS on December 20, 2024, announced in IR-2024-313 the release of draft instructions for the new Form 6765, Credit for Increasing Research Activities. Form 6765, which is pivotal for businesses that annually claim hundreds of millions of dollars in research credits, is undergoing significant revisions aimed at imposing stricter documentation requirements on taxpayers. These instructions will be used in conjunction with the revised Form 6765.
Background
The IRS first proposed changes to Form 6765 in September 2023. In June 2024, after reviewing comments from external stakeholders, the IRS announced a revised draft version of Form 6765. The IRS continues to use the feedback that it received to shape the current draft form and its instructions, reflecting the IRS’s commitment to collaboration, and improving the information collected for tax administration to better manage the resources of both taxpayers and the IRS. For prior coverage, see BDO’s alerts, Preparing for New Section 41 R&D Tax Credit Requirements and IRS Issues Revised Draft Form 6765, Credit for Increasing Research Activities.
The revised draft Form 6765 introduces several new sections:
- Section E: Seeks additional business information, providing a broader context for research activities.
- Section F: Summarizes qualified research expenses, offering a clear overview of costs associated with research activities.
- Section G:Focuses on business component details, which will be optional for tax year 2024 but mandatory from tax year 2025 onwards.
- For tax year 2025, Section G will be mandatory for all filers, with optional reporting for qualified small business (QSB) taxpayers, defined under Internal Revenue Code Section 41(h)(3) as taxpayers who check the box to claim a reduced payroll tax credit, or taxpayers with total qualified research expenses (QREs) equal to or less than $1.5 million, determined at the control group level and equal to or less than $50 million of gross receipts, as determined under Section 448(c)(3) (without regard to subparagraph (A) thereof), claiming a research credit on an original filed return.
Draft Instructions
The IRS is actively seeking feedback from stakeholders to refine the Form 6765 instructions, particularly focusing on the following key areas:
- Section G Reporting for Controlled Groups: The draft instructions request the following information be included via an attachment to Form 6765: (1) the number of controlled group members for both the current tax year and the previous tax year; and (2) whether the QREs are being claimed on one consolidated group return, or on separate returns. Taxpayers have not previously been required to disclose this information when filing Form 6765.
- Section G Business Component Detail: The draft instructions further clarify the necessary reporting requirements of Section G, Business Component Detail, by addressing several open questions, including the definition of terms, business component descriptive names, business component types, and whether it is necessary to describe the information sought to be discovered by business component on an original return.
- ASC 730 Directive: Taxpayers using the ASC 730 directive to determine QREs must report ASC 730 QREs as a single business component and are not required to provide the business component detail mandated under Section G. However, additional IRS guidance on the ASC 730 directive is crucial for consistent reporting by taxpayers, because the draft instructions do not clarify whether the ASC 730 business component must be used to determine 80% of the taxpayer’s QREs or whether the ASC 730 business component that is at least 80% of its total QREs must be reported on an aggregate basis.
- Statistical Sampling: The draft instructions clarify that taxpayers using statistical sampling must report the same business component information as required from all other taxpayers. The draft instructions require these taxpayers to report the lesser of 80% of total QREs or 50 business components, “irrespective of which business components were used for [the] statistical sample,” and report any remaining business components on an aggregate basis. It is important to note that taxpayers using statistical sampling must add the word “sample” to the end of any business component name and attach a statistical sampling plan. The IRS has not defined what satisfies a statistical sampling plan.
Additional Changes
- Item A: Section 280C Election: Previous versions of the draft Form 6765 raised uncertainty for taxpayers attempting to report a protective Section 280C “reduced credit” election without selecting a credit method. In response, the IRS updated Form 6765 such that filers will report the 280C election at the top of page 1, line A. Taxpayers should be aware that the draft instructions explicitly provide that when making the 280C election, the taxpayer is not making an affirmative selection of credit method.
Effective Date
The IRS encourages taxpayers to review and consider using the new format of the revised draft Form 6765 when preparing their tax year 2024 return; however, the final tax year 2024 Form 6765 and instructions are not expected to be published until late January 2025.
How to Submit Feedback
Tax professionals and stakeholders are encouraged to submit their feedback on the draft instructions for the tax year 2024. The deadline for submissions is June 30, 2025. Feedback can be submitted to [email protected] through June 30, 2025, using the subject line “Instructions for Form 6765.” The IRS has committed to consider all feedback to ensure the instructions for tax year 2025, processing year 2026, are comprehensive and user-friendly.
How BDO Can Help
The IRS’s call for feedback on the draft instructions for Form 6765 represents a significant opportunity for tax professionals and businesses to influence the future of research credit reporting and help mitigate the burden of potential compliance requirements. By engaging with the IRS and providing thoughtful feedback, stakeholders can help make the final instructions clear, comprehensive, and effective in facilitating accurate tax reporting. This involvement is important to minimize confusion and eliminate inconsistent reporting.
The revised Form 6765 is expected to bring significant changes to how the R&D tax credit is claimed and how research activities and expenses are reported. The BDO Business Incentives & Tax Credits group has extensive experience assisting taxpayers of all industries and sizes to evaluate their qualified R&D expenses, calculate their credit claim amount for filing and, when necessary, defend the position before the IRS. As companies continue to invest in innovation, tax leaders should be aware of the potential for future changes to R&D tax policy, including the ability to meet these heightened reporting requirements.
For more information on how BDO can help, please visit BDO’s Business Incentives & Tax Credits page.