Background
As part of the IRS’s ongoing efforts to impose stricter documentation requirements on taxpayers who claim the research tax credit, they released proposed changes to the Form 6765 on September 15, 2023, that would take effect beginning with the 2024 tax year. The changes to the form were to provide taxpayers with a consistent and predefined format and to improve the information received for tax administration.
The initial draft included the addition of two new sections of information reporting seeking detailed information about business components for both quantitative and qualitative reporting, reordering some of the existing fields on the form and adding new questions seeking various other information related to the amount of officers’ wages included in wages for qualified services and information related to the acquisition or disposition of any major portions of the trade or business during the year.
New Proposed Changes to Form 6765 (IR-2024-171)
The new draft form released on June 21, 2024, removes several requirements from the previous version and introduces new thresholds to relieve small businesses from extensive reporting. These revisions were in response to feedback received from external stakeholders that revealed the reporting of information as detailed in the previous draft would be overly burdensome for the taxpayer.
- A reduction in scope was made to the “Business Component Detail” section and it is now optional for:
- “Qualified small business” taxpayers who check the box to claim a reduced payroll tax credit, or
- Taxpayers claiming a research credit on an original filed return who have total QREs equal to or less than $1.5 million, determined at the control group level, and equal to or less than $50 million of gross receipts, as determined under Section 448 (c )(3) (without regard to subparagraph (A) thereof).
- This section will be optional for all filers for tax year 2024 (processing year 2025) to allow taxpayers time to transition to the new format.
- A reduction in the number of business components that must be reported:
- Reporting would be required in descending order by the amount of total qualified research expenditures (QREs) per business component, up to a maximum of 50 business components or 80% of total QREs, whichever is smaller.
- This change alleviates some of the potential reporting burden imposed on large taxpayers who engage in significant numbers of research projects. The previous draft contained no limits on the number of business components that would have had to be identified and detailed in the reporting.
- The categories of business component information that taxpayers would be required to report on were also reduced.
- Specifically, the requirement of whether business component was new or improved, its use (i.e. sale, lease or license), and a summary describing the information sought to be discovered (for original returns only) has been eliminated.
- The IRS plans to clarify the definitions for officers, controlled group reporting and business component descriptive names in the instructions.
The proposed changes to Form 6765 reflect the IRS's responsiveness to taxpayer concerns by streamlining the reporting requirements, particularly for small businesses. These adjustments aim to reduce the compliance burden while still ensuring accurate and efficient tax administration. If you have questions or need further clarification on how these changes might impact your business, please don't hesitate to contact us for more information.
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