Introduction
Are you ready for the most significant R&D tax credit changes in years? The IRS has introduced three new sections—Sections E, F, and G—on Form 6765, and these updates are reshaping how businesses substantiate their claims.
These changes aren’t just more boxes to check. Section E now requires a summary of claim information. Section F breaks down qualified research expenses (QREs) by type, like wages and supplies. Section G, though optional, requests detailed information by business component. Together, they make your documentation more critical than ever.
Imagine having airtight substantiation that not only meets these new requirements but positions your business to maximize savings and avoid audits. With the right preparation, these changes can actually work in your favor.
In this article, we’ll break down the R&D tax credit changes, explain their impact on your business, and give you a clear roadmap to compliance. Let’s dive in!
Key Points Summary of Major R&D Tax Credit Changes in 2024
- New Section E: Summary of Claim Information
- Report the number of business components contributing to your Qualified Research Expenses (QREs).
- Specify the amount of officers’ wages included in your QREs.
- Indicate if you acquired or sold any major part of your business during the tax year.
- Disclose any new types of expenses included as QREs.
- For large businesses, note if you used the ASC 730 Directive to calculate QREs.
- New Section F: Breaking Down Expenses by Type
- Categorize expenses into wages, supplies, and contract research.
- No new information is required, but the section organizes details previously spread across other parts of the form.
- New Section G: Details by Business Component (Optional for all taxpayers for tax year 2024)
- Provide identifying details for each business component, including name and activity type.
- Describe the research and technological challenges for each component.
- Break down expenses by component, including wages, supplies, computer leases, and contract research.
- Attach additional sheets if reporting multiple business components.
What Is the R&D Tax Credit? (Brief Overview)
The R&D tax credit is a government incentive to reward businesses for creating new products or improving existing ones. If your company spends money on research and development (R&D), you can use this credit to reduce the amount of taxes you owe.
Here’s how it works: businesses often invest in things like developing new software, improving a manufacturing process, or testing new product designs. These activities can qualify for the credit if they involve solving problems through science, engineering, or technology.
The credit applies to expenses like:
- Wages for employees who work on R&D.
- Supplies used in experiments or testing.
- Contract research done by outside experts.
The R&D tax credit helps businesses recover some of the money spent on innovation. It’s available for companies of all sizes, not just large corporations, and can even benefit startups with little or no taxable income.
What Are the Major Changes to the R&D Tax Credit in 2024?
In 2024, the IRS made some important changes to the R&D tax credit to make sure businesses provide more details when claiming it. These changes affect the way companies report their expenses and activities. Here’s what’s new:
- New Section E: Summary of Claim Information
Section E of the new Form 6765 introduces a set of required questions designed to provide an overview of key details related to your R&D tax credit claim. Here’s what Section E asks for and why it matters:
- Number of Business Components (Line 37):
- You must report how many business components contributed to your qualified research expenses (QREs). Business components include products, processes, or software you are developing or improving. This helps the IRS understand the scope of your research activities.
- Officers’ Wages (Line 38):
- This section requires you to specify how much of the total wages included in your claim were paid to officers of the company. This ensures clarity in how leadership salaries factor into QREs.
- Major Changes in Business Operations (Line 39):
- You must indicate whether you acquired or disposed of any major portion of your business during the tax year. This provides context for any large fluctuations in your expenses or activities.
- New Expense Categories (Line 40):
- Section E asks if you included any new types of expenses as QREs that you haven’t claimed before. This is crucial because it flags any changes in how you calculate your R&D expenses.
- ASC 730 Directive (Line 41):
- For large businesses with audited financial statements, Section E asks if you used the ASC 730 Directive to calculate your QREs. This directive applies to companies with $10 million or more in assets and specifies how R&D expenses are recorded for tax purposes.
- New Section F: Breaking Down Expenses by Type
Section F is also required and asks businesses to split their R&D expenses into three main categories:
- Wages: The money paid to employees working on research projects.
- Supplies: Materials used during research or experiments.
- Contract Research: Payments to outside experts or companies who help with R&D.
- Rental or Lease Cost of Computers: Payments made for cloud computing expenses during the R&D process.
- Basic Research Payments: Payments made for research to non-profit entities to expand knowledge in general, not to create a product for a business. This category of expenses is relatively rare.
Information in this section used to appear in Sections A and B in previous years, and there is no new information being asked for in Section F.
- New Section G: Details by Business Component
Section G of the new Form 6765 asks for detailed information about your R&D activities organized by business component. While this section is optional, completing it can strengthen your claim by providing additional context and evidence. Here’s what Section G includes:
- Identifying Information:
- Businesses must provide details about each business component, such as:
- The name or unique identifier of the component (e.g., product, process, or software being developed).
- The principal business activity code related to the research.
- Businesses must provide details about each business component, such as:
- Type of Business Component:
- You must categorize the type of business component, such as whether it involves software, manufacturing, or another field.
- Description of the Information Being Discovered:
- This section asks for a brief explanation of the research conducted for each business component. The description should focus on what new knowledge was sought or which technological challenges were addressed.
- Expenses by Business Component:
- Each business component requires a detailed breakdown of related expenses, including:
- Direct Research Wages: Employee wages tied to the component.
- Direct Supervision and Support Wages: Salaries for supervisors and support staff involved in the research.
- Supply Costs: Material expenses specific to the component.
- Rental/Lease of Computers: Computer-related expenses for this component.
- Contract Research: Third-party research costs tied to the component.
- Each business component requires a detailed breakdown of related expenses, including:
- Totals Across Components:
- Section G allows for multiple business components, with spaces for detailed reporting and an option to attach additional sheets if needed.
- Stricter Rules for Documentation
The IRS now wants businesses to keep better records to prove their R&D tax credit claims. This means:
- Tracking employee time spent on research projects.
- Keeping notes, invoices, and receipts for all expenses.
- Explaining how your work fits the rules for R&D.
These stricter rules mean you’ll need to be more organized to make sure your claim is accurate.
Key Impacts of the Changes
The recent changes to the R&D tax credit will make claiming it more detailed and time-consuming. Here’s how these updates could affect your business:
- More Work to Prove Your Claim
You now need to provide more details about your expenses. For example, Section E requires a breakdown of officer wages and the number of business components.
In Section G, you may also need to explain your research activities for each business component. While optional, completing this section can strengthen your claim.
- Higher Risk of Mistakes
With so much information required, it’s easier to make errors.
Mistakes in your form or missing documentation can trigger IRS audits or delay your credit. Careful attention to detail is more important than ever.
- Opportunity to Strengthen Your Claim
The new rules can actually help you create a stronger case for your credit.
Sections E, F, and G require detailed information, which can show that your research truly qualifies for the credit. This level of transparency can protect you during an audit.
How to Stay Compliant
To stay compliant with these changes, you’ll need to prepare carefully. Here are some steps to help:
- Keep Detailed Records
Track employee time spent on research activities.
Save receipts for supplies and contracts used in research.
Keep notes about the purpose and results of each project or business component.
- Organize by Category and Component
Break down expenses into the categories required in Section F, such as wages, supplies, computers, and contract research.
If possible, tie each expense to a specific business component for easier reporting in Section G.
- Use Software or Tools
Consider using tools like TaxRobot to ensure you meet all of the new filing requirements.
This reduces the risk of errors and makes filling out the form easier.
- Review IRS Rules Carefully
Follow the instructions for each section of Form 6765 to ensure your claim meets the new requirements.
If you’re unsure, consult with a tax professional who understands the R&D tax credit.
- Start Early
Don’t wait until tax season to gather your records.
Begin tracking and organizing expenses throughout the year to avoid last-minute scrambling.
Opportunities from the Changes
The new changes to the R&D tax credit may feel like extra work, but they also bring some real benefits. Here’s how your business can take advantage of these updates:
- Stronger Credit Claims
The extra details required in Sections E, F, and G give you a chance to build a solid case for your R&D tax credit.
The more specific and organized your claim, the harder it is for the IRS to challenge it. This can mean fewer audits and a smoother process for getting your credit.
- Prepare for Growth
The focus on detailed tracking and documentation pushes businesses to be more organized.
This isn’t just helpful for taxes—it also sets you up for smoother financial management and planning. If you’re growing, having clear systems in place makes it easier to track and report R&D activities in the future.
- Showcase Innovation
Section G gives you a chance to highlight the innovative work your business is doing.
This isn’t just helpful for taxes—it can also show investors, partners, or customers the value of your research and development.
Turn the Changes into an Advantage
By embracing the new requirements and R&D tax credit changes, you can find more qualifying costs, strengthen your credit claims, and make your business more organized for the future.
These changes might seem like extra work, but they can also help your company grow and thrive.