IRS Releases Revised Draft Form 6765 for Taxpayers Claiming Research Tax Credits

On Friday June 21, 2024, the U.S. Internal Revenue Service (IRS) released a revised draft Form 6765, the form taxpayers use to claim the I.R.C. § 41 Credit for Increasing Research Activities, and an accompanying press release.¹ The revised draft modifies several of the proposed changes to Form 6765 previewed by the IRS last fall and heavily criticized by taxpayers.²

Background

On Sept. 15, 2023, the IRS issued proposed changes to Form 6765 and requested feedback from interested parties. Among other changes, the initial draft added a new “Business Component Information” section, which would have required taxpayers to report extensive quantitative and qualitative information for every business component for which the research credit was claimed. The changes proposed last fall also included new questions seeking various types of information, such as the amount of the officers’ wages included in wages for qualified services and whether the taxpayer acquired or disposed of any major portion of a trade or business during the tax year. The IRS also solicited comments regarding whether the new Business Component Information section should be optional for certain taxpayers.

New Proposed Changes

Reduced scope of business component information and new Section G

The Business Component Information section, labeled “Section F” in the initial draft, has been moved to a new Section G. The new draft’s key substantive change is a reduction in the number of business components that taxpayers must report. The form now instructs taxpayers to include the required information for each business component in descending order by the amount of total qualified research expenditures (QREs) per business component, up to a maximum of 50 business components or 80% of total QREs, whichever is smaller. This proposed change, although resulting in information that is still more onerous than required by the current form, should alleviate some of the potential reporting burden imposed on large taxpayers who engage in significant numbers of research projects, as the prior draft contained no limits on the number of business components that taxpayers would have had to identify and detail. 

The IRS also reduced the categories of business component information that taxpayers must report on Section G. For example, the IRS eliminated the requirement to specify whether a business component was new or improved, the business component’s use (i.e., a sale, lease, license, or taxpayer use), and — for original returns only — the narrative requirement that describes the information sought to be discovered. The new form also decreases the selections for the type of business component, and the IRS says that it plans to clarify the definitions for officers, controlled group reporting, and business component descriptive names in the forthcoming instructions.

Additionally, for taxpayers that determine QREs following the ASC 730 Directive, the IRS says that it will include special instructions to permit those taxpayers to report ASC 730 QREs as a single line item on Section G.³  

Conspicuously unchanged, however, is the proposed requirement for taxpayers to report separately the amount of direct support and direct supervision wages for qualified services allocated to each business component identified on Section G. This aligns with the IRS’s continuing efforts to push its aggressive interpretation of how direct support and supervision activities should be taken into account for purposes of the “substantially all” test, despite the contrary, taxpayer-friendly decision handed down by the U.S. Court of Appeals for the Seventh Circuit last year in Little Sandy Coal v. Commissioner, previously discussed in this Sidley Update.

Moreover, the IRS has not released any guidance for taxpayers who use statistical sampling that complies with Revenue Procedure 2011-42 to report the research credit. For example, it is unclear whether such taxpayers should report the requested information for the 50 largest business components overall or the 50 largest business components from the statistical sample.

Bifurcation of Section F

Section F has been renamed “Qualified Research Expenses Summary,” which now reflects the remaining questions from the previously proposed Section F and reorders information that taxpayers currently report on the form, such as the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

Optional reporting of business component information for 2024 for everyone and for certain taxpayers after 2024

Revised Section G will be optional for all taxpayers for tax year 2024, which the IRS anticipates should allow sufficient time to transition to the Section G format.

Additionally, in response to feedback from interested parties, the new instructions for Form 6765 will provide that Section G will be optional for

• “qualified small business” taxpayers who check the box to claim a reduced payroll tax credit, or
• taxpayers claiming a research credit on an original filed return who have 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).

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Our tax controversy practice has substantial experience with the research credit, and we currently represent numerous large corporations in research credit exams and before IRS Appeals.  If you’d like more information about our experience in this area, please contact us.