Form 6765 is undergoing significant changes for tax year 2024. The changes are expected given the amount of attention the R&D tax credits have received by taxpayers, espcically for taxpayers claiming payroll refunds. Return-preparing CPAs and EAs should be aware that there are details requested as disclosure on the proposed new form, and the quality of information being provided to the IRS.
2024 Draft Form 6765 introduces Section G and adds new subsections and lines that significantly impact the reporting and compliance for the R&D credit. Below is a detailed breakdown of each line item within Section G. We expect this will be the last revision and be made effective for tax year starting 1/1/2024:
Section G now requires taxpayer to provide so-called Business Component Information. Business Component is defined in the IRS code section 41 as the “the application of the information discovered as a result of the research activity must be intended to be useful in the development of a new or improved business component of the taxpayer“. As such, return preparers or R&D consultants need to spell out what the taxpayer intended to discover or improve in a given year. This is typically construed as either a project, a subsection of the project, or in some cases, a functional capability of a product.
Line 49(a): EIN of the controlled group member conducting the research activities on this business component is typically the EIN for the entity claiming the R&D credits.
Line 49(b): Controlled group member’s principal business activities code should be consistent with the code used in the information section of your business entity return.
Line 49(c): Business component’s name or unique alphanumerical number is either the project name or the naming convention for the project or the development effort. For companies that have multiple years of on-going development on a single project, it needs to be as precise as possible when providing the business component name.
Line 49(d): Business component type is typically a 1) product, 2) process, 3) computer software, 4) Technique, 4) formula, and/or 5) invention.
Line 49(e): If the selection in 49(d) above is software, then the additional disclosure needed here is either 1) Internal use software (IUS), 2) NON-IUS – developed to be used with third parties and not used by taxpayer in its G&A, 3) NON-IUS – developed to be commercially sold, leased, licensed, or othewise marketed to third parties, or 4) Dual functional software.
Line 49(f): Describe the information sought to be discovered should include the product’s functional capabilities, intended achievements, or performance metrics. While this is subjective information, the Regulation (Reg 1.41) specifies what constitutes qualified discoveries.
Line 49(g): (Not required or included in the 2024 revision) Describe the alternatives in overcoming technical challenges.
Line 50, 51, and 52 requires breakdown of the total qualified wage research expenditures by the types of qualified activities. The types of qualified activities includes: 1) direct research, 2) direct supervision, and/or 3) direct support. Typically, and within the direct research categories, we should further break down the activities by either functional requirement gathering, prototyping, and or testing.
Line 54: Qualified supplies used or consumed that relate to each business component.
Line 55: Qualified rental and lease of computer equipment that relates to each business component
Line 56: Qualified 3rd party contract research payments made that relate to each business component
Overall, while this June 2024 revision represented a major step back from the amount of details that would needed from the Jan 2024 draft form, it is still significantly more than what precious years form 6765 was asking. This represents a step up from the IRS enforcement action to ensure that information being classified as qualified R&D would have ample documentation to substantiate upon a potential audit.
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