The new Form 6765 is active and requires taxpayers to furnish the most comprehensive information needed to claim the R&D tax credit since its enactment in 1981. Additional information is required for members of a controlled group of corporations or group of trades or businesses under common control.
Form 6765 Section E — other information
The form adds a new section requiring:
- The number of business components generating qualified research expenses (QRE)
- The amount of officers’ wages included in wage QREs
- Whether any QREs related to an acquisition or disposition of any major portion of a trade or business in the tax year
- Whether any new categories of expenses were included as current year QREs
- Whether any of the QREs were determined under the ASC 730 Directive
Form 6765 Section G — business component information
This new section requires taxpayers to report information regarding its business components, including items such as:
- The controlled group member employer identification number (EIN) and principal business activity code
- Business component name and component type
- If the business component is software, then the type of software
- Wage QREs by business component, broken down by activity type
- Supplies, contract research, and rental or lease of computers QREs by business component
How form 6765 could impact you
Though some tax returns have already been filed — potentially before the form was even available — and others are in queue, taxpayers and tax preparers need to be aware of the new challenges Form 6765 presents and educate themselves to ensure proper compliance.
New rules, new methodology
Your current methodology to determine R&D tax credits might not address all the elements of Form 6765. Taxpayers and tax preparers may need to strategize on new approaches to comply with form requirements.
For example, taxpayers currently using a statistical sampling approach under Revenue Procedure 2011-42 — a valid R&D tax credit methodology — likely will not have all the information needed to comply with the form requirements either because of the sample unit definition or because the sample units selected don’t cover the details required on the form.
The IRS acknowledges some may be employing this methodology; however, the IRS still states you need to comply with the requirements as written “irrespective of which business components were used for your statistical sample.”
New assessment criteria
The IRS may risk-assess your Form 6765. As stated in the original news release accompanying the preview Form 6765 in September 2023, the changes help the IRS accomplish objects such as “using enhanced data and analytics to operate more efficiently and select the highest risk cases.”
How the IRS determines risk
The IRS doesn’t provide insight on how it will determine the highest risk cases, but one can infer.
For example, although IRC Section 41 does not prevent an officer from being included in qualified R&D expenses, and courts have ruled titles do not dictate whether qualified research activities were performed, the IRS request for qualified wages attributable to officers in the new Section E of Form 6765 signifies a potential area of high-risk focus for the IRS.
Accordingly, taxpayers need to ensure appropriate documentation is in place to substantiate the amount of time such individuals spent on R&D activities, how those activities were considered qualified research, and potentially why their wage amount was reasonable.
New time commitments
The new Form 6765 will take you longer to prepare. While the time estimates provided in the instructions are based on each taxpayer’s circumstances, the estimates provided match the prior forms, even though the new form and instructions are significantly longer.
Proper lead time needs to be considered for gathering the information and preparing the form and attachments; the information requested is not something that can easily be completed just before the deadline.
Form 6765’s phased approach
The new form requirements come in a phased approach.
The new Section G of Form 6765, requiring substantial information about a taxpayer’s business components, such as detailed business component information, is optional for tax years beginning before 2025 but will be required for tax years beginning after 2024.
The tax landscape can shift dramatically within a single year and it’s unclear whether the new administration will alleviate the taxpayer burden related to Form 6765.
