Back in 2021, the IRS released new guidance pertaining to R&D tax credit refunds claims. The requirements went into effect in 2022, and while the demands presented a host of new compliance burdens, the overall premise was straightforward and simple: More information on a granular level, please.
Fast-forward to September 2023, and the IRS has released proposed changes to Form 6765—the required documentation to calculate and claim the R&D tax credit—essentially reinforcing the fact that all R&D activities will be reviewed under a new and more powerful microscope. While the IRS has yet to release an official updated version of Form 6765, the website mentions the agency is considering tax year 2024 as a launch date. So, take the hint. Change is likely coming and the time to prepare is now. Here are a few ways to get started.
Understand the Changes: There are three main changes to what was a two-page form— the addition of two questions at the top of the form before Section A, along with two new sections, Section E and F, with F mandating the most extensive detail. The questions before Section A ask upfront if you’re electing the reduced credit under IRC 280C and if you’re a member of a controlled group.
Section E asks just five general questions about R&D—with the most notable addition being the amount of officers’ wages included in wages for qualified services. It also requests that taxpayers identify any new categories of expenditures included in the qualified research expenses (QREs).
Section F is where the form’s most significant changes take place. It requests detailed qualitative and quantitative information for each business component generating the credit. Among other low-level details, this includes the business component’s descriptive name, the category of the business component (product, process, computer software, technique, formula, or invention), a description of the process of experimentation including all the alternatives evaluated, whether the business component was new or improved, and categorized wage expenses allocated to each business component (direct, supervision, or support).
Rethink Your Accounting: Given the level of detail in the IRS’s proposal, you may want to revamp your R&D accounting, so you can accurately assign QREs to specific business components. Now is the time to evaluate additional methods of tracking R&D expenditures at a more granular level, such as implementing time tracking or job costing strategies.
Report Contemporaneously: Supporting contemporaneous documentation is no longer a luxury—if the IRS expects to see QREs on a business component level, contemporaneous documentation is a must. Reporting in real-time is the best way to collect and retain the minute level of detail you’ll need from subject matter experts, and officers involved in R&D, and to ensure accuracy, and produce robust documentation.
Enlist the Help of R&D Tax Credit Experts: With potential changes on the R&D horizon—and additional scrutiny guaranteed—the best way to claim R&D tax credits is by working with specialists who know the playing field. R&D tax credit experts can help develop new processes to meet the demands of business component reporting and produce robust, accurate documentation. R&D tax credit professionals add depth and breadth to any tax team, as they maximize credits, and often, identify opportunities that were missed in the past.
Continue to Claim the Credit! Additional reporting and documentation can overload already-exhausted tax departments, but what’s even worse is that they can deter taxpayers from claiming the credit altogether. Some may think they don’t have the resources to claim adequately, or that the reward doesn’t justify the cost. Wrong. The R&D tax credit is still one of the largest annual corporate tax breaks in the US. A dollar-for-dollar credit—equaling roughly 10 percent of a company’s R&D spend—it’s instant cash that can be reinvested in the business. Sure, new compliance demands can be burdensome, but they can—and should—be met. After all, why forgo a reward you’ve already earned?
