On September 15, 2023, the IRS released a preview of proposed changes to Form 6765, inviting input from stakeholders on these revisions before the official release of the updated draft. These modifications are slated for implementation in fiscal year 2024, with taxpayers having until October 31, 2023, to submit their feedback to the IRS.

The key proposed changes by the IRS include the addition of two new sections:

• Section E—Other Information, containing miscellaneous questions.
• Section F—Business Component Information, designed to collect information for each claimed Business Component (BC).

The pivotal changes proposed by the IRS encompass the incorporation of two novel sections:

• Section E—Other Information: This section encompasses an array of miscellaneous questions.
• Section F—Business Component Information: Tailored to assemble data for each claimed Business Component (BC).

Additionally, an important shift is the relocation of the options for reduced credit and the query concerning controlled groups or businesses under common control to the form’s summit, previously found at lines 17 and 34. This alteration is a response to feedback from stakeholders.

Here, we provide a comprehensive analysis of the IRS’s principal proposed modifications.

Section E – Other Information

The new Section E aims to collect pertinent data for potential credit audits of submitted claims. The new inquiries include:

• Number of business components generating the claimed credit.
• Amount of officers’ wages included in the claim.
• Did the company acquire or dispose of a significant portion of a trade or business in the tax year? (Yes/No)
• Did the company identify any new expenditure categories in the current year’s Qualified Research Expenses (QRE)? (Yes/No)
• Did the company derive any QREs on line 9 or line 28 following the ASC 730 Directive? (Yes/No) If “Yes,” input the amount from Appendix C, Line 19.

While some of these queries may seem repetitive, such as the number of business components, others hint at areas of IRS scrutiny during audits. A primary focus here lies in the inclusion or recharacterization of new QRE categories. In such cases, IRS guidance suggests incorporating the newly identified QREs in the current year’s calculation and the calculation of the base amount.

Consequently, if a business identifies a fresh type of eligible expenditure, such as leasing computers, it may factor it into the current year’s credit calculation. Nonetheless, this also necessitates businesses to retrospectively review previous tax years during the base amount calculation, identifying new qualified costs incurred in those prior years and using them in the calculation, even if not previously claimed.

In addition, the question concerning claimed officer’s wages indicates that the IRS will scrutinize the personnel categories claimed.

Section F – Business Component Information

This section constitutes the IRS’s primary proposed change and pertains to the reporting of business components (BC). This new section is divided into two parts:

• Lines 50 to 57, which allow for the presentation of information required for each business component, including:
  • 50(a) EIN of the entity
  • 50(b) Business activity code
  • 50(c) Name of the BC[1]
  • 50(d) Information sought to be discovered
  • 50(e) Whether the BC is new or improved (select one)
  • 50(f) Type of BC: product, process, computer software, technique, formula, or invention
  • 50(g) Whether the BC is held for sale, lease, license, or business use
  • 50(h) If software, whether it is for internal use, dual function, or non-internal use (with a total of 10 options)
  • 51 Amount of direct research wages
  • 52 Direct supervision wages
  • 53 Direct support wages
  • 54 Total qualified wages (add lines 51, 52, and 53)
  • 55 Cost of supplies
  • 56 Cost of rented or leased computers
  • 57 Amount of contract expenses
• Lines 58 to 64 correspond to the sums of the preceding lines for each type of expense, including a separate accounting for “basic research payments,” as well as the total claimed expenses.

Among these changes, there is a clear intention by the IRS to gather information on claimed wages, with a separation by business component for direct research wages, direct supervision, and direct support wages. Additionally, special attention is given to software development, as indicated by item 50(h), which is exclusively related to this type of activity.

This new Section F aligns with the recent significant change made to the R&D tax credit, which increased reporting requirements for amended R&D Tax Credit (RDTC) claims. It also provides a predefined format for reporting this information, which should meet the expectations of taxpayers seeking better clarity on IRS requirements in this regard.

Conclusion

The IRS has proposed changes to Form 6765 – Credit for Increasing Research Activities for fiscal year 2024. These proposed changes are not final, and the IRS seeks feedback from stakeholders before implementing them. Nevertheless, the updates to Form 6765 outline the direction the IRS is taking for the upcoming tax years. All these changes appear to be geared towards streamlining the IRS audit process.

The new categories on this form frequently refer to the form’s filling instructions, which are not yet available. These instructions are expected to provide additional insights into IRS expectations.

[1] Information provided by the IRS indicates that if you are eligible and choose to follow the ASC 730 directive (ASC730), you will report your computed “Adjusted ASC 730 Financial Statement R&D QRE Amounts” as a single business component, identifying it as “ASC 730.” Any additional QREs must be reported for each business component.

How FI Group can help your company 

FI Group is a worldwide lead consulting firm, whose target is the Management of Public Tax Credits for Research, Development & Innovation (RD&I). If you want to know what can be done to help your investments and your company’s growth, contact us to learn more about our services and how we can help you. Through global support, FI Group can give you all the answers and opportunities.