On June 21, the IRS released a revised draft Form 6765, which incorporates some feedback from stakeholders on the draft form previewed in September 2023. The June draft form is proposed to be effective for the 2025 tax year. Despite these changes, the draft Form 6765 still will require taxpayers to provide substantial quantitative and qualitative details that significantly differ from the current form. In June, the IRS also announced changes to the rules for R&D credit refund claims.
The initial release of the June draft Form 6765 indicated that it was a final form. That version quickly was replaced with a version of the form labeled draft. Although the initial release as final could be a sign that no further changes will be made to the form, interested stakeholders can continue to provide feedback.
June draft Form 6765
The following is a summary of major sections of the June draft Form 6765:
- “Other information” in Section E. This section largely is unchanged from the September version of the draft form. The latest draft form did not include definitions of terms used as part of each line item’s requirements. Information required by this section includes:
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Number of business components generating the R&D credit
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Amount of officers’ wages included in qualified research expenses (QREs)
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Yes or no questions around whether the taxpayer:
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Acquired or disposed of a major portion of a trade or business
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Identified any new categories of expenditures in the current year
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Determined any of the QREs following the Accounting Standards Codification (ASC) 730, “Research and Development,” directive
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Revised Section F. Section F on the September draft is moved to Section G in the June draft. The June draft adds the following taxpayers that are not required to complete Section G:
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Qualified small-business taxpayers that check the box to claim a reduced payroll tax credit under Section 41(h)
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Taxpayers that claim an R&D credit on an original return with total QREs equal to or less than $1.5 million, determined at the controlled-group level, and equal to or less than $50 million of gross receipts, as determined under Section 448(c)(3)
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Business component detail moved to new Section G. The June draft form makes significant changes to Section G (Section F on the September draft) by requiring more detail for all business components as follows:
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Taxpayers are required to report the top 80% of business components (in descending order by QRE amount), but no more than 50 business components. There are special instructions for taxpayers using the ASC 730 directive that describe who can report ASC 730 QREs as a single line item in Section G. This change makes using the ASC 730 directive more attractive to large taxpayers as a way to reduce the burden of providing the business component level of detail required by this new section.
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Taxpayers must describe the “information sought to be discovered” for each of the business components. This language has been pared down from the September version of the draft form, which required taxpayers to identify “one or more alternatives evaluated in the process of experimentation for each business component.”
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Taxpayers must provide QREs at the business component level (for example, wage QREs by direct research, supervision, or support, as well as expense QREs by each business component). This requirement is unchanged from the September draft of the form.
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The new Section G will be included on the 2024 Form 6765 but will be optional for all filers for the 2024 tax year, allowing taxpayers an opportunity to transition to the Section G format before the 2025 tax year.
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Other changes in the June draft form:
The June draft no longer asks for the following information:
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Whether the business component was new or improved
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How the business component was used (sale, lease, license, or used by the taxpayer)
Additionally, the June draft form still asks for business component type, but there are fewer options for the type of the business component (product, process, computer software, technique, formula, or invention).
Definitions and an explanation of the information required for each line item will be in the instructions to the form, which have not yet been released.
Crowe observation
The revised draft Form 6765 differs drastically from the 2023 Form 6765 and will require taxpayers to examine their current process to understand how it will align with the proposed new requirements. Proactive planning is necessary to be ready for the 2025 effective date.
R&D refund claims
On June 18, 2024, the IRS also announced that effective immediately it is removing the following two pieces of information previously required when submitting R&D credit refund claims for all claims postmarked as of June 18, 2024:
- The names of the individuals who performed each research activity
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The information each individual sought to discover
The IRS stated that a taxpayer might be required to provide this information if the refund claim is selected for examination.
Taxpayers still will need to provide the following information in the form of a written statement as described in the original informal IRS guidance issued in 2021:
- All the business components to which the R&D credit claim relates for that year
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All research activities performed for each business component
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The total qualified employee wage expenses, total qualified supply expenses, and total qualified contract R&D expenses for the claim year (which may be done using Form 6765)
Looking ahead
The June draft of Form 6765 provides insight into how the IRS views the R&D credit and extends the burdensome requirements for filing R&D credit refund claims filed on amended returns to R&D claims included on original income tax returns. Taxpayers should consult with their tax advisers to understand how the proposed form revisions, which are likely to be finalized, and changes to the R&D refund claim requirements will affect the identification, qualification, and documentation of the R&D credit, including the time and resources that will be necessary to provide the required information.
