Claiming R&D tax credits in the United States will require more detail and preparation if proposed changes to IRS Form 6765 go into effect for tax year 2024.
First pitched in September 2023, the new changes will put the onus on claimants to get more granular in their reporting, helping IRS agents more clearly understand whether R&D activities are truly worthy while (ideally) speeding up the approval process.
Already, claimants are getting used to the higher burden-of-proof introduced in 2021 when the IRS pushed a slew of changes requesting greater detail in tax credit applications across the board. This includes providing a “written statement” instead of a “production of documents,” as well as a unit-by-unit breakdown of expenses associated with qualifying business components.
The changes pitched in September 2023 call for even more granularity, with changes to Form 6765, including:
- An expanded Section E, including 5 new questions about “miscellaneous” business functions,
- A new Section F, detailing quantitative and qualitative data for qualifying business components (required under Section 41 of the Internal Revenue Code),
- And prioritizing the “reduced credit” election question and the “controlled groups or businesses under common control” question by moving from line 17 and line 34 (respectively) to the top of Form 6765 (above Section A).
While the changes haven’t officially been enacted, it’s expected that the IRS will aim to start enforcing them in tax year 2024, if not 2025.
Either way, it’s critical that claimants know what to expect. We break down the key components of the changes and how teams can start preparing now to ensure they don’t miss a step when it comes to maximizing their claim totals.
More granularity for a (hopefully) smoother approval
Starting at the top of Form 6765, by moving the “reduced credit” and the “controlled groups or businesses under common control” questions to the top of the form, the IRS can more immediately understand if you’re electing the reduced credit under IRC 280C or not.
The new Section E and the five questions within aim to line-item expenditures so that agents have more clarity on the true costs and outcomes of your R&D. This includes listing “officer’s wages” as part of the wages for qualified services, for instance, as well as listing any new “categories of expenditures” included in the qualified research expenses.
Section F introduces the biggest changes to Form 6765, asking claimants to provide detailed qualitative and quantitative data for all business components involved in the claim.
For instance, you’ll need to define the category of the business component (product, process, computer software, technique, formula, or invention), while also providing a detailed description of the process of experimentation. This includes all the alternatives evaluated, whether the business component was new or improved, and categorized wage expenses relevant to each business component (direct, supervision, or support).
Take a proactive approach to R&D tax credit claim prep
While the changes to Form 6765 are extensive, the goal is pretty straightforward: Deliver more detail to the IRS. As such, teams have had to rethink their approach to compiling an R&D tax credit claim from the top-down—and will need to continue evolving their processes as new standards go live.
For instance, teams will need to be more diligent in their time tracking, ensuring that they have a clear picture of what investments (ie. payroll costs for engineers) tie to outcomes (credit-eligible R&D activities).
Teams also need to take a more active approach to reporting their R&D activities to deliver the level of granularity in their claim that the IRS will expect going forward. Contemporaneous documentation on all activities and outcomes will be a must—not a nice to have—and will call on detail from many different arms of the business to produce.
By aligning your workflow, payroll and financial data into a single system of R&D intelligence, Boast allows innovative businesses to actively track their investments and outcomes, while aligning relevant contemporaneous data with the appropriate QREs to deliver a robust R&D tax credit claim.
While some teams may see the higher claim standards as an obstacle, Boast helps teams view this greater diligence as an opportunity to not just claim more tax credits, but optimize their processes completely. By visualizing activities and costs to outcomes, Boast delivers a holistic picture of your R&D that no other platform can encompass.
To learn more about how Boast can help you maximize your R&D tax claim while optimizing your processes, talk to an expert today.
IRS Form 6765 FAQ
- What are the proposed changes to IRS Form 6765 for claiming R&D tax credits? The proposed changes aim to require more detailed reporting from claimants. This includes an expanded Section E with new questions about business functions, a new Section F for providing qualitative and quantitative data on qualifying business components, and moving the “reduced credit” and “controlled groups” questions to the top of the form.
- Why are these changes being introduced? The changes are intended to provide the IRS with more granular information about the claimed R&D activities, helping agents better understand whether the activities are truly eligible. The goal is to ideally speed up the approval process by providing more clarity upfront.
- How can teams prepare for these changes? Teams will need to be more diligent in their time tracking and contemporaneous documentation of R&D activities and outcomes. This includes clearly tracking investments (e.g., payroll costs for engineers) tied to credit-eligible activities and maintaining detailed records of the experimentation process, alternatives evaluated, and categorized wage expenses for each business component.
- What are the benefits of a more detailed approach to R&D tax credit claims? While the changes require more effort, a more detailed and proactive approach can help teams maximize their claim totals by ensuring they capture all eligible expenses and activities. It also allows for better alignment of R&D investments and outcomes, optimizing processes and providing a holistic view of the organization’s R&D activities.
- How can Boast help with the new requirements? Boast’s platform allows businesses to actively track their R&D investments and outcomes, aligning relevant data with qualified research expenses (QREs) to deliver a robust R&D tax credit claim. By integrating workflow, payroll, and financial data, Boast provides a comprehensive system for R&D intelligence and contemporaneous documentation, enabling teams to meet the IRS’s higher standards while optimizing their processes.
