The R&D Credit Tax Form is Getting a Major Update

At a glance

• The main takeaway: Proposed changes to Form 6765 would substantially change the process for claiming an R&D credit.
• Impact on your business: The proposed changes would increase the qualitative and quantitative information required at the time of filing, thereby increasing the administrative burden and the audit risk associated with claiming the credit.
• Next steps: Aprio will be preparing feedback to share with the IRS and congressional representatives, and we encourage impacted taxpayers to do so as well.

The full story:

On September 15, 2023, the IRS released a preview of its proposed changes to Form 6765, the tax form used to claim the Federal Research and Development (R&D) Tax Credit, as well as a request for feedback from taxpayers and tax professionals. Although the proposed form is not final, and the new form would likely not impact taxpayers until they file for the 2024 tax year, the changes could be unfavorable to taxpayers claiming the R&D tax credit.

We urge taxpayers who have historically benefited from the R&D credit to review these changes, detailed below, and provide feedback to the IRS and your congressional representatives. A template for this feedback along with insights into Aprio’s most pressing questions for the IRS regarding these changes, can be found at the end of this article.

Proposed changes to Form 6765 substantially increases the information taxpayers must report to the IRS.

The most significant changes in the new proposed form include the introduction of two new sections: Section E, which includes five questions on “other information,” and Section F, which includes extensive questions specific to taxpayers’ business components used in the calculation of the credit.

The new Section E would require taxpayers to disclose such information as their number of business components, the amount of officers’ wages, details on organizational changes, new expenditure categories, and the nexus with GAAP accounting and taxpayers following the ASC 730 directive. Section F encompasses two pages of questions specific to a company’s business components and qualifying criteria enabling the taxpayer to claim the credit, including the specific activities and costs included in the taxpayer’s credit.

The changes also highlight two questions being brought to the top of the Form regarding the taxpayer’s election of a reduced credit and whether the company is under common control.

Newly requested information raises questions about the scope, intent, and practicality.

These changes substantially increase the amount of quantitative and qualitative information that taxpayers must report at the time of filing their tax returns, in some cases beyond the scope of what is required to qualify for the R&D credit. The proposed form would significantly increase the administrative burden associated with claiming the credit and make it unfeasible for some companies to benefit, especially taxpayers planning to optimize the Qualified Small Business Federal Withholding election. Further, the new form raises concerns regarding how the IRS intends to use the reported information. While the new questions would likely help to reduce fraudulent credit claims, it could also leave legitimate claims more exposed to audit risk. Additionally, unclear phrasing and lack of defined terms used in the proposed form could leave taxpayers vulnerable to misunderstandings that the IRS may interpret as disqualifying responses.

Take effective action.

Aprio believes any change that could preclude a business from claiming the R&D credit goes against the true intent of the credit itself, which is to incentivize American innovation. To limit that incentive to only the largest, wealthiest companies would be overlooking a critical sector for true innovation: small businesses and startups. Aprio’s R&D credit specialists have several questions and concerns regarding the proposed form that we plan to formally submit to the IRS. We also plan to reach out to our congressional representatives, and we encourage taxpayers to do the same. If you wish to submit commentary or feedback on the proposed changes, either directly to the IRS or to your congressional representative, we’ve provided some sample language below you may reference:

Dear representative,

I am writing to express concern over the proposed changes to IRS Form 6765, Credit for Increasing Research Activities. The changes the IRS have proposed are a significant departure from the previous form and would substantially increase the risk and the administrative burden associated with claiming the credit, to the extent that it could impact companies’ ability to benefit from the credit at all.

Mitigating fraudulent credit claims is critical, but those efforts should not come at the expense of taxpayers with legitimate claims. The proposed changes would require companies to provide excessive quantitative and qualitative information regarding their qualifications for the credit. While this information is an important piece of accurately calculating the credit, preparing that information timely to filing deadlines and with the accuracy required to protect the credit from an audit would not be possible for many small businesses and startup companies.

The R&D Tax Credit was designed to encourage and support American innovation, and startup companies play a vital role in advancing modern technology. The proposed changes would disincentivize these important players from continuing to engage in R&D, which undermines the original intent of the credit. Please support us in our efforts to limit these changes, or at least impose a credit threshold of $250,000 with an additional exemption for taxpayers eligible for the Qualified Small Business Federal Withholding election. These exemptions would help to protect small businesses and startups in their efforts to claim the credit and continue investing in R&D.

The bottom line

The newly proposed Form 6765 for R&D credit claims would dramatically change the process of claiming the credit, potentially disincentivizing many businesses from pursuing the credit altogether. Fortunately, these changes are unlikely to go into effect until businesses are filing 2024 returns, so the IRS has provided ample opportunity for taxpayers and tax professionals to provide feedback.

Aprio’s R&D Tax Credit specialists are available to discuss further impacts of these changes to your business.

Related Resources/Assets/Aprio.com articles/pages

Will Claiming the R&D Credit Result in an Audit?

New IRS Guidance on Amortizing R&D Costs

Raising the Stakes for R&D Tax Credit Refunds