Preparing Form 6765 for the R&D Credit: IRS Challenges and Proposed Updates

Description

Stated simply, the R&D tax credit, codified under Section 41 of the Internal Revenue Code, is for increasing research activities. This credit incentivizes businesses to develop new or improved products, processes, formulas, techniques, inventions or software. Generally speaking, the R&D credit amounts to six to ten percent of every eligible dollar qualified, which may reduce a company's federal income tax liability dollar for dollar.

Start-up ventures, often not in an income tax paying position, may similarly benefit from a payroll liability offset. Formerly, for eligible small businesses the R&D credit could be used against up to $250,000 of payroll liabilities. The Inflation Reduction Act generously doubled this amount to $500,000 for tax years beginning Jan. 1, 2023. With either a federal income tax offset or payroll liability offset, completing Form 6765, Credit for Increasing Research Activities, properly is key.

Recently, in response to improperly filed claims, the IRS expanded the information required to be submitted when filing for a R&D tax credit as a claim for refund. In the event a taxpayer files for a claim for refund and does not submit the required information or provided insufficient information, the IRS will notify the taxpayer of that deficiency, and the taxpayer has a 45-day window to “perfect” or correct that claim. The IRS has recently extended the 45-day period for correcting or “perfecting” a claim until Jan. 10, 2025, at which point there will no longer be a 45 day “perfection” period. Additionally, the IRS has proposed changes to Form 6765 for tax years beginning on or after January 1, 2024, which will require more documentation and qualitative information from taxpayers at the time of filing an original claim. Taxpayers and businesses performing research activities need to grasp the components of the new Form 6765 and the underlying requirements for the Section 41 credit.

Listen as our panel of tax credit experts explains the R&D credit and provides illustrative examples, including completion of Forms 6765 and 8974.