In Brief
- Filing the new R&D Credit form requires more effort from Companies
- Small Business will most likely avoid itemizing expenses on the new Form.
- Timely Filers will be rewarded by avoiding describing their qualified expenses.
- Contact CFO Services to help you understand the requirements and plan ahead for the more detailed filing.
R&D Credit Form Changes
Back in 2023, the IRS sent out an early preview of the change they planned to make with the R&D Credit Form (6765). The IRS will require companies to use the new form during the 2025 tax year.
One of the biggest changes in the draft form required companies to list all their qualified expenses in a new Section G. This would be accomplished by listing out all the companies’ Business Components (BC) for which all qualified expenses should be connected. This one change alone was a tremendous burden in filling out the form. Companies could have from 10 to100 BCs that qualified, all of which would now have to be categorized, described, and itemized. And describing each Business Component was likely the biggest burden out of the three, explaining how each BCs, in a sentence or two, qualified for the R&D Credit.
One area of hope came from the form’s instructions, which would come later, clarifying how the form should be filed out. Recently, IRS released the instructions for the new form. Companies did receive some relief with listing BCs, but only a small amount. The instructions excluded some small companies from filling out Section G. For the other companies, they would still have to categorize and itemize BCs. But if they filed timely, they won’t have to describe them.
Business Component Requirements
There are some companies that can skip filling out the new Section G. Companies have to meet one of the two requirements. If a company is a Qualified Small Business, meaning they could or have claimed Section D (Payroll Tax Election), they don’t have to complete this section. Companies can also skip this section if they have a total amount of Qualified Research Expenses equal to or less than 1.5M and gross receipts are equal to or less than $50M. Although companies only have to meet one of the two requirements, most likely only a subset of small businesses can meet one of these, leaving most companies with the task of recording BCs.
Business Component Information
Business Component Information (Section G) has broken out three aspects to record a company’s BC; its type, description, and the breakout of expenses. IRS did clarify that companies only need to record the BCs that make up either 80% of their qualified expenses or the top 50, whichever comes first.
All BCs need a Principal Business Activity number. Most likely this will be the same number used for the company. BC will be categorized as either a Product, Process, or Other. This relates to one of the tests for the R&D Credit. Most companies will most likely select either the Product or Process categories. The Other category will mainly be for BC that are software. If a company has software as a BC, then they would select the Other. Additionally, a software BC will need to be categorized further. There are 4 additional options for software BCs: Internal-Use, Dual-Function, Non-IUS, and Excepted from IUS. In most cases, companies will select non-IUS, which indicates the software is sold.
Companies will then need to describe the major activities that improved or created the BC. The form only allows a sentence, maybe two.
Lastly, each BC will break out its expenses through wages, supplies, and contractor research, which are the usual costs that can qualify for the R&D Credit. Wages will need to be broken down further by those who directly worked on research, from those who supervised and supported it.
Small Relief for Timely Filing
The biggest news that came out of the draft instructions related to the one descriptive entry for BC. If a company files timely, they don’t need to describe the BCs, not needing to fill out column 49(f) on the form. This does give companies pause to file an amended return, which would include the R&D Credit. Only amended filers will have to fill out all 6 columns, which includes describing each BC.
The instructions for the new R&D credit form did clarify and reduce some effort for companies. The question remains how much? Some smaller companies won’t have to list their BCs at all. And for companies that file timely, they won’t have to describe each BC. This new form will be more of an administrative effort to complete than the previous form. It is welcomed the new instructions helped lower the effort to fill out the new one. It is just not that much.
And with this extra work, what will the IRS do with this information? One would hope it would reduce the IRS initiating and prolonging costly audits. The small relief given in the new form should likely by the measure of hope used with the IRS efficiently handling R&D credit audits in the future.
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