The §41 credit for increasing research activities allows for a percentage of qualifying R&E expenditures to be used in a dollar-for-dollar offset of federal income taxes. Form 6765 is used to calculate and claim the credit. Beginning in tax year 2024, the IRS is implementing additional reporting requirements on an updated and enhanced Form 6765.
At the date of this article, Form 6765 is still in draft form. As drafted, a total of three new sections have been introduced. New schedules and respective requirements are listed below:
Schedule E – Other information
- Number of business components with Qualified Research Expenses (QREs)
- Officer wages
- Business acquisitions and/or dispositions
- New categories of QRE expenditures
- Whether QREs follow ASC 730
Schedule F – Qualified Research Expenses Summary
- Total wages
- Total cost of supplies
- Total rental or lease expenses for computers
- Total contract and basic research payments
Schedule G – Business Component information
- Controlled group member’s EIN and business activity code
- Business component names and types
- Software designation
- Information desired from the research
- Wage information for each business component detailed in the following categories:
- Direct research
- Direct supervision
- Direct support
- Amounts for the following:
- Supplies expense
- Rent or lease of computers
- Contract research expenses
It should be noted that not all business components need reported on Schedule G. The IRS is requiring that businesses report components that accounted for 80% of QREs. These will be presented in decreasing order of QREs, up to a maximum of 50 components. Special guidance applies to taxpayers using ASC 730; QREs will be reported as a single line item.
Currently, the IRS is providing exemptions from reporting for Schedule G only. For 2024, it will be optional for all filers, but for tax year 2025, it will be required unless an exception is met. One of the two exceptions listed below must be met when filing on a 2025 return:
- Qualified Small Business taxpayers who elect to claim a reduced payroll tax credit
- Companies with Qualified Research Expenses under $1.5 million and gross receipts of $50 million or less
The changes to the R&E Tax Credit reporting requirements come in addition to changes that occurred as a result of the Tax Cut and Jobs Act (TCJA). Prior to January 1, 2022, taxpayers had options regarding how R&E expenditures were handled for tax reporting purposes. At the time, IRC §174 allowed two options: immediate expensing of qualified R&E expenditures or the less popular option of amortizing costs over 5 years. Taking an immediate deduction often significantly reduced federal income taxes. However, with the passage of the TCJA, the option for immediate expensing of qualified R&E expenditures no longer existed. In tax years beginning on or after January 1, 2022, qualifying R&E expenditures must be capitalized and amortized over a 5-year period (15 years for foreign activities). This mandatory capitalization also applies to software development costs, regardless of intended use (commercial or internal). The amortization period begins at the midpoint of the taxable year in which the R&E expenses were paid or incurred, effectively limiting the deduction to 10% in the tax year that the expenses were paid or incurred. Refer to our prior article for additional information.
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