Author: Michael Krajcer, JD, CPA, President, and Margaret Krajcer, JD, Vice President and General Counsel of Tax Credits Group
This article originally appeared in the Winter 2025 issue of the South Carolina CPA Report
Overview
The R&D credit has existed for more than 40 years and is claimed annually by millions of U.S. companies. Historically, taxpayers claiming the credit on an originally filed tax return Form 6765 ‘Credit for Increasing Research Activities’ have been required to submit limited information on the Qualified Research Expenses (QRE) comprising the claim.
Now, in an attempt to make improvements to this four-decade process, the IRS recently sent shockwaves throughout the research and development community by issuing two separate drafts proposing significant revisions to Form 6765.
The initial draft showcased the IRS’s intent to require taxpayers to provide an unprecedented amount of information upfront in the originally filed return. (Currently, taxpayers are only required to provide such documentation under IRS audit, and are given reasonable time to gather and submit information after the claim has been filed.) The secondary draft took into account some concerns expressed by external stakeholders, but still mandates taxpayers submit extensive qualitative and quantitative documentation along with the return. Should the proposal be made final, taxpayers will soon see a dramatic increase in the information and documentation required on their tax return, creating an undue administrative burden during the already busy filing season
New reporting requirements and implementation dates
Compared to the present Form 67651, the latest draft proposes several changes, most notably two new reporting sections requiring taxpayers to provide the following information upfront:
NEW “Section E – Other Information”
Number of business components generating the claimed expense for credit calculation (QRE);
Officers’ wages included in QRE;
- Officers’ wages included in QRE;
- Acquisition or disposition of any major portion of a trade of business in the tax year;
- Any new categories of expenditures included in the current year QRE;
- Use of the IRS ASC 730 Directive to determine any of the QRE.
- ALL taxpayers will be required to complete Section E
NEW “Section G – Business Component Information”
For business components that make up 80% of the QRE claimed in the current year, but no more than 50 business components in total;
- Identification of the taxpayer entity conducting the research;
- Identification of the business component name, type (if computer software, the category of software), and information sought to be discovered;
- Identification of wage QRE by business component, broken down by direct, supervision, and support categories
Identification of supply costs, rental or lease of computer costs, and contract research expenses by business component.
The IRS has provided exemptions for two categories of taxpayers, stating that Section G will be optional for the
following
Qualified Small Business (QSB) taxpayers, defined under section 41(h)(1) & (2) who check the box to claim a reduced payroll tax credit; or
Taxpayers with 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), claiming a research credit on an original filed return.
Additionally, per the notice accompanying the release of the latest draft form, taxpayers using the ASC 730 directive will be able to report ASC 730 QREs as a single line item on Section G.
The new reporting of Section G will be optional for all filers during tax year 2024, allowing taxpayers time to transition to the Section G format. Starting with the 2025 tax year, completing Section G will be mandatory for those subject to its reporting requirements.
Implications for taxpayers
Unfortunately, taxpayers will now have to invest further effort to secure an incentive which already requires substantial efforts to obtain. With this in mind, taxpayers should be proactive in planning for these upcoming changes by analyzing their current data-gathering methods and making any necessary adjustments to ensure compliance with the new requirements by the mandated implementation dates.
Implications for CPAs
For tax return preparers, the ability to rely on general ledger accounting or taxpayer provided R&D expense summaries to prepare Form 6765 has ended. A coordinated effort will now be needed with clients and/or their R&D credit consultants to ensure proper data gathering methods are in place, and the required level of detail can be secured in time to meet filing deadlines.
CPAs should begin preparations immediately, meeting with their clients/R&D credit consultants to discuss the logistics of data gathering and data sharing. This will help ensure the necessary workplan is in place to meet this new compliance burden.
CPAs should also work with their clients/R&D credit consultants to verify whether existing credit methodologies and reporting strategies still serve their best interest. For example, given this preferential reporting treatment for ASC 730, eligible taxpayers may benefit from reconsidering to reconsider electing this directive in the future
Still to come
Once revised Form 6765 becomes final, taxpayers should expect to receive further guidance from the IRS on the new data submission requirements. How the return review process will actually work—and the turnaround times taxpayers should expect from auditors if there are any issues with form submission— remains to be determined.
At TCG, we are staying on top of this critical tax filing issue and will present findings and/or updates as they are discovered.
