Navigate with Confidence: Your Guide to the New R&D Tax Credit Rules for 2024

Picture this: You're a business on the brink of tax-season excitement, and suddenly, you hear whispers of changes to the Research & Development (R&D) tax credit. It's like learning there's a new flavor of your favorite ice cream—exciting, but also a bit unknown.

Now, here's the scoop: The IRS is implementing some changes to Form 6765 starting in 2024, the form that makes claiming the R&D tax credit official on your tax return.

Now, the interesting part (and potentially a bit challenging): these changes could make the whole process just a tad more complex, adding some extra steps to your R&D tax credit journey.

But it’s better to be informed and prepared instead of blindsided at that last minute right?‍

Consider this your heads-up and let’s go through these in detail.

The Current Landscape: Understanding Form 6765

Form 6765 is the application form you fill out to get this wonderful gift. Just like when you want to join a club at school and have to fill out a form, if you want the R&D tax credit, you've got to fill out Form 6765.

What's on Form 6765?

Form 6765 is split into different sections. Think of it as different questions on a quiz, where each section asks about a different part of your R&D activities.

• General Info: This is where you put basic information like your name and address.
• Regular Credit Calculation: This section asks about your R&D expenses. It's like when you save up your allowance and then tell your parents how you spent it. You're showing the government how much you spent on R&D stuff.
• Alternative Simplified Credit: Some people find the regular way of calculating the credit a bit hard, so there's a simpler way. This section is like a shortcut in a video game - it's a different path to get to the same goal.‍
• Base Amount for Start-Up Companies: If your company is new, there's a special section just for you. It's a way to figure out how much credit you get based on how new you are and how much you're spending on R&D.

Imagine you did a bunch of chores around the house, and your parents promised you an allowance for it. You wouldn't want to miss out on that allowance, right? Similarly, if your company is doing R&D work, you wouldn't want to miss out on the money the government is offering. So, filling out this form is like making sure you get the allowance you deserve!

What’s more is: It is directly linked to IRS Section 41, the rulebook that defines what counts as R&D in the eyes of the IRS. It's like having a set of guidelines that helps you identify and report your eligible research expenses correctly.

So to put it simply, form 6765 is your tool to turn innovation into money. Break down your R&D costs, and use the form to make a strong case for recognition and rewards tied to your commitment to improving technology and processes.

The Proposed Changes to Form 6765 by IRS: A Deep Dive

The goal per the IRS is to make the form easier for everyone to use and understand. This way, when companies fill it out to get their R&D money back, there are fewer mistakes and everything runs smoother.

What Changes Are They Proposing?

• Adding two new sections:

1. Section E: This will have 5 new questions asking for various details (details below):
2. Section F: This section will ask about specific business projects related to R&D (details below):

• Moving stuff around: Two questions on the old form are now moving to the top with the hope of helping people see and answer them more clearly.
• Making Section F optional for some: The IRS is thinking about letting certain companies skip Section F. This might be for smaller companies or ones that don't spend a ton on R&D.

A) New Additions –

Section E: Five new questions seeking miscellaneous business information.

This is the new kid on the block, and it captures additional information. Notably, it checks if there are new categories of expenditures included in the current year's qualified R&D expenses. Here are the new questions:

1. How many different parts of your business are contributing to the credit?
2. The part of the officers' salaries included in the wages for qualified services.
3. Did you buy or sell a big chunk of your business?
4. Any new types of spending in your current research costs.
5. Did you calculate any of the costs on line 9 or line 28 following the rules of the Accounting Standards Codification (ASC) 730 Directive?

Section F: Detailed information for every business component as per Section 41 of the Internal Revenue Code.

This section includes a comprehensive breakdown of each business component generating the credit. Lines 50 through 57 collect detailed information for each component, including EIN, business activity code, descriptive name, etc. This part looks like it's set up to give you a clearer and more organized way to report your information.

This part, from lines 50 to 57, is where Section F wants you to add more detail about your R&D related projects:

1. Name of the business component.
2. What you're trying to find out with this component and the options you considered during your experiments.
3. Whether this component is something new or an improvement.
4. The type of component it is, like a product, process, computer software, technique, formula, or invention.
5. How you use this component, like selling it, leasing it, or using it in your business.
6. If it's computer software, specify its category—whether it's for internal use, used externally, has dual functions, or falls under exceptions.

In a nutshell, this section is requiring more qualitative information than previous years. The government wants to have a clearer picture of what kinds of R&D projects companies are doing. This can help them understand where innovation is happening. By asking more detailed questions, the IRS can ensure that companies are truly doing the kind of R&D that deserves the tax credit.

B) Structural Changes –

The IRS is now proposing to add two important questions, at the top of Form 6765. These were previously part of the calculations in Section A (Regular Credit) and Section B (Alternative Simplified Credit).

The two key questions moved to the top of Form 6765 are:

1. Are you electing the reduced credit under IRC 280C?

• This is about choosing a reduced credit option under a specific tax code.

2. Are you a member of a controlled group or business under common control?

• This question helps identify if the taxpayer is part of a larger group or shares control with another business.

Every year, tons of companies claim the R&D credit. But, there's been some confusion and mistakes. By tweaking the form a bit, the IRS hopes to make things clearer and more efficient for everyone.

Implications of the changes for Businesses: How Will This Affect Me?

These proposed changes to Form 6765 might be stirring up a bit of concern for you. As the IRS is basically asking for more detailed information upfront, almost like a sneak peek into your business's R&D activities. This shift could mean more work for you, as you'll need to provide a deeper dive into your research expenses right from the get-go.

What does all this mean for you?

Enhanced Record-Keeping:

The current calculation methods, based on a more general criteria, are being replaced by a more detailed approach. Now, you need to provide specific details for each of your business’s components contributing to QREs—things like its name, purpose, and whether it's new or improved. This detailed breakdown is not just for reporting; it's a risk-assessment tool for the IRS.

This shift towards a thorough evaluation and enhanced record keeping means a deeper scrutiny of QREs. You will now be required to back up your R&D tax credit claims with a detailed breakdown of each component's contribution. It's like the IRS wants you to show your work, step by step, for each piece of research to get that tax credit.

Here’s a bit trickier part: If you’re using statistical sampling in line with Revenue Procedure 2011-42, the information given doesn't specify how you should report details for business components not selected for evaluation. 

Having additional guidance for businesses like yours, which rely on statistical sampling, would be beneficial. The proposed changes still lack clarity in this area.

Adjusted Prioritization:

In the new Form 6765, the IRS wants you to focus on two key questions right at the start. This is likely to make it easier for you to highlight important details about your research right from the start. It's a way to ensure that key information is front and center, making the process of claiming the Research & Development tax credit more straightforward, efficient and organized. It's like a roadmap to help you through the process.

Broader Perspective: The IRS’s Increased Scrutiny

In the past year, you've likely noticed a significant upswing in the IRS's attention toward Research and Development (R&D) tax credit submissions. This keen interest started in the form of last year's major changes, particularly under the Tax Cuts and Jobs Act of 2017 and the subsequent amendments to Section 174. These alterations meant you need to undertake a more detailed approach. This required you to take the careful capitalization and amortization of R&D costs over designated periods. 

Just as everyone was getting used to these changes, the IRS said, "Wait, we need even more info!" Starting in 2022, if companies wanted this special R&D money back, they had to give a lot of details. This includes what kind of research they did, who was involved, and exactly how they spent their money. And in September, the IRS hinted at more changes. It's clear they want to be super sure about the details companies provide. They want to see the full picture, not just a quick sketch.

Why all these changes? Well, the IRS wants to make sure everyone is honest and clear about their R&D work. They also want to use better tools and data to make their job easier. Getting this R&D money back is a big deal for many, so the IRS is working to make the whole process better and fairer for everyone.

Conclusion and Forward Look:

Right now, we're waiting for the final decision from the IRS about the proposed changes to Form 6765. It's important to stay informed about these changes and consider seeking professional advice from an R&D tax credit company like TaxTaker.

Meanwhile, the IRS is keen on hearing from stakeholders like you. They want feedback on the reasons behind these changes, the limits they've set, and the pros and cons of each. You can share your thoughts and questions by emailing Lbi.rt.team@irs.gov with the subject line: “Feedback/Questions F6765.”

Remember, the IRS will take into account all the feedback they receive before making the final decisions on the changes to Form 6765. So, your input matters!

Keep an eye out for the formal release of the draft Form 6765 and its subsequent release for taxpayer use. Although they're planning to make these changes for the 2024 tax year, the nature and amount of feedback they get might make them rethink things and possibly delay the release.

Want to get a head start on your R&D claim for next year? Book some time with us.

‍