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.
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.
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.
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 has five questions, most of which require a yes or no response.
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.
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.
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.
There are two overarching categories of qualified research expenditures: in-house and contract research expenses. The in-house category includes both wages and supplies.
This question asks you to affirm that your determination of QRE is in line with the IRS guidance.
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:
As you can tell, there is much more information required in 2024 than in previous years. What can you do now?
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.
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.
Contact us here or call 800.899.4623.