Businesses that capitalize on the popular Research and Development Tax Credit need to be aware of changes in reporting requirements for the 2024 tax year.
The IRS issued proposed changes to the reporting requirements for the R&D tax credit. These proposed changes will now require qualitative ― in addition to the previously required quantitative ― requirements. It‘s important that the information needed for these new reporting requirements is integrated in the company’s internal procedures.
Why the Change to Reporting Requirements?
The IRS’s objective with these changes is to reduce the number of non-compliant claims. To accomplish this, the IRS is requiring more specific information regarding the extent and intent of the projects in which the expenditures relate to.
When Are the New Reporting Requirements Taking Effect?
Changes to IRS Form 6765, Credit for Increasing Research Activities, are expected to go into effect for tax year 2024.
Now is the time to prepare for the new Form 6765.
What Are the New Reporting Requirements?
There were several proposed changes by the IRS, but the most important is the addition of two reporting sections on Form 6765. A new “Section E” will require responses to five questions, which a new “Section F” will require detail regarding the responses in Section E.
Let’s take a closer look at what the new sections entail.
Section E
Section E has five questions, most of which require a yes or no response.
Question 1 — Number of Business Components
The intent of this question is to identify the number of different R&D projects the company was involved in during the year. The term “business component” refers to any product, process, software, technique, formula or invention developed for internal or external use. The detail behind the business components determined here will be required in Section F.
Question 2 — Officers’ Compensation
Any officer’s compensation included in the qualified wages will need to be reported separately. This separate reporting requirement implies the IRS’s intent to scrutinize the involvement of top personnel in R&D activities.
Question 3 — Acquisitions and Dispositions
This yes or no question deals with the acquisition or disposition of major portions of a trade or business. This will help in the evaluation of the expenditures claimed.
Question 4 — New Categories of Qualified Research Expenditures (QRE)
There are two overarching categories of qualified research expenditures: in-house and contract research expenses. The in-house category includes both wages and supplies.
Question 5 — ASC 730 Directive
This question asks you to affirm that your determination of QRE is in line with the IRS guidance.
Section F
This section may be the most cumbersome of the changes. Each business component identified in Question 1 above will be required to be addressed. Documentation and recordkeeping throughout the year will substantially lessen the lift at the end of the year.
We recommend recording the following information throughout the year to make the filing of the new Form 6765 easier:
- Descriptive name for each of the business components
- Description of the goal of the research and the alternatives evaluated as part of the experimentation process
- Whether the component is new or improved
- The type of business component (see options in Section E, Question 1)
- Identification of each business component’s use (sale, lease, license, internal use)
- If software related, the type and use of software
- Breakout for each business component’s QRE
- Direct wages
- Direct supervision wages
- Direct support wages
- Supply costs
- Rental or lease costs of computers
- Contract research
What to Do Now
As you can tell, there is much more information required in 2024 than in previous years. What can you do now?
1. Collaboration
Meet with the appropriate department heads and identify the information you will need to report on. Ask those who are most familiar with various projects for input to close the gap for things that happened earlier this year, and ideas for tracking going forward.
2. Develop Procedures
There is not a one-size-fits-all solution for this reporting. Depending on your accounting, ERP and other internal systems, each company is going to have a different approach. Once you establish your approach to meeting the new reporting requirements, make sure it is memorialized in writing and implemented correctly.
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