IRS Update re: Research Credit Refund Claims

In two releases made days apart in mid-June, the IRS stated that it is waiving certain information required to accompany Forms 6765 filed with amended returns, and reducing the scope of information required on draft Form 6765s issued for stakeholder commentary. 

These changes reduce the burden on research credit claimants and continue the IRS’s efforts to standardize the documentation of research credit claims. 

IRS Changes Information Required for Research Credit Refund Claims on Amended Returns

On June 18, 2024, the Internal Revenue Service (IRS) announced that it no longer requires certain requirements for valid Research and Development Credit (research credit) claims made on amended returns. This change is effective for returns filed on or after June 18, 2024. (IR-2021-203, updated June 18, 2024)

Previously, the IRS announced that taxpayers filing a refund claim with an IRC section 41 research credit must include five items with the amended return. 

The five items were:

1. Identify all the business components to which the Section 41 research credit claim relates for that year.
2. For each business component, identify all research activities performed.
3. For each business component, provide the names of the individuals who performed each research activity.
4. Provide the information each individual sought to discover for each business component.
5. Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. This may be done using Form 6765, Credit for Increasing Research Activities.

Two requirements are waived for claims filed on or after June 18, 2024. These are numbers 3 and 4 above, or:

1. The names of the individuals who performed each research activity, and 
2. The information each individual sought to discover. 

While this information will not be expected on refund claims in the future, taxpayers are advised that the IRS reserves the right to request it if the refund claim is selected for examination. 

Additional Reminder re: Research Credit Refund Claims

Also, the IRS extended the transition period, during which taxpayers have 45 days to perfect a research claim for refund before the IRS makes its final determination on the claim through January 10, 2025.

IRS Releases Revised Draft Form 6765, Credit for Increasing Research Activities

On June 21, 2024, the Internal Revenue Service (IRS) released a revised draft Form 6765, Credit for Increasing Research Activities. (IR 2024-171) This revision waived certain additional information proposed last year for taxpayers claiming Research and Development Tax Credits (research credit.) 

On September 15, 2023, the IRS released its first draft of proposed changes and solicited stakeholder comments (IR-2023-173). That draft form requested additional information about the nature of the research activities conducted, additional quantitative and qualitative information details for business components, and moved questions previously asked in different sections. As a result of comments regarding the draft Form 6765, the IRS revised the original draft with current version released on June 21, 2024. The revisions reduce the scope of information required with Form 6765.

The new form is proposed with the following general effective dates:

• 2024 tax years – Optional, transition year
• 2025 tax years – Required 

The revisions to Form 6765 reduce the scope of information required, and align with the recent IRS notice reducing in the scope of information required for valid refund claims on amended returns.

The current draft Form 6765 includes the following revisions:

• The section labeled Section F on the originally released draft Form 6765 is relabeled Section G
• Section G would not be required for:
  • Qualified Small Businesses (QSB) taxpayers who claim a reduced payroll tax credit, or 
  • Taxpayers with
    • Qualified research expenditures (QRE) equal to or less than $1.5 million and
    • Gross receipts (GR) of $50 million or less. 
• Reduced Business Component Quantitative Detail
  • Taxpayers must report 80% of the total QREs ordered in descending order by the amount of QREs per business component
    • Limited to 50 business components
• The scope of qualitative information required in filings for each business component was also reduced. Under the new draft Form 6765, taxpayers will not be required to include the following information with their return:
  • The purpose of the activities conducted by the business component. 
    • For example, a new product, improvements to products, etc. 
    • The number of types of business components has been reduced. These categories and specifics are promised in forthcoming Form 6765 instructions. 
  • The commercial intent for the business component
    •  For example, sale, lease, or license or for use in their trade or business
  • Taxpayers will not be required to provide narrative detail on the information sought to be discovered during the processes of examination. 

Final thoughts

Despite these changes, taxpayers are advised that the IRS reserves the right to request additional information, including information waived or not required to be reported on the return when filed if the refund claim is selected for examination. While additional information will be required relative to past claims, there have been no changes to the documentation requirements for credit claims.

For taxpayers who analyze and document their research credit and expenses properly through their bookkeeping processes or research credit studies, the additional information will slightly increase their compliance burden. These changes create a standardization of information reporting that should provide comfort to credit claimants. 

Please contact your Herbein tax consultant if you have questions or need assistance with the Research and Development Credit.

Article contributed by Corning Pearson