Updates to the Research Credit Form and Instructions
Late in 2023, the IRS released a draft of the 2024 tax form for the research credit (Form 6765). The draft of Form 6765 contains two new sections on the form, one of which (Schedule F) would require disclosure of details pertaining to each business component, which if incorporated into the final draft of the form, will increase the burden in completing the form.
The new section on business component information is consistent with the new approach introduced by the Office of Chief Counsel in October 2021. Under the new approach, the business component information on the 2024 draft form was initially required for claims filed on or after January 10, 2022. The IRS then granted a 1-year transition period until January 10, 2023, and subsequently extended the transition period an additional year until January 10, 2024. During this transition period (January 10, 2022, through January 10, 2024), taxpayers who did not provide the required information for a research claim were required to provide the business component information within 45 days of an IRS request. Failure to provide the information results in a rejection of the entire claim for refund.
Thus, certain taxpayers have already been providing this information under IRS audit since the beginning of 2022. The new draft of Form 6765 simply requires this information upfront for claims filed for the 2024 tax year.
If you are filing an amended return to claim (or increase) the research and development credit after January 10, 2024, for a year prior to 2024, you must provide the new information, even though the current form 6765 has not been updated yet.
The IRS was considering whether the new changes, including the new business component information, should be optional on Form 6765. However, last month they revised the instructions to Form 6765 to require the business component information for amended returns. Thus, because amended returns filed in 2024 now require the information, it is even more likely that the final version Form 6765 for 2024, yet to be revealed, will have Schedule F included. Note that in any case, the IRS has indicated that any such information will be required upon request if providing such information on Form 6765 ends up being optional for certain taxpayers.
This announcement comes on the heels of interim guidance also issued by the IRS in September on the required amortization of research and experimental expenditures under Section 174 of the code. By way of background, all expenditures listed on Form 6765 must first qualify as research and experimental expenditures under Section 174 of the code. Since all research and experimental expenditures must now be written off over 5 years (15 years for foreign expenditures), all expenditures shown on Form 6765 that would otherwise be deductible must also be written off over the 5 years (15 years for foreign expenditures). Note that in addition to the expenditures listed on Form 6765, all other research and experimental expenditures (including indirect expenses such as rent and utilities), as well as software development costs, are also subject to the amortization rule. See below for an update on expense treatment.
Research and Experimental Expenditures Update
As noted above, the IRS also issued interim guidance in September (Notice 2023-63) on the amortization of research and experimental expenditures, including software development costs. Taxpayers may follow the rules provided in the Notice until regulations are issued. While the interim guidance provides some clarity to the amortization rule, it still leaves some questions unanswered, with the lion share of the guidance coming in the more complicated situations. More importantly to onlookers, other than providing for a few exclusions, the notice does not provide any relief to the harsh amortization requirement. Thus, regardless of whether you claim a research credit, all research and experimental expenditures (including indirect expenditures such as rent and utilities) and software development costs that would have otherwise been deducted in tax years beginning after 12/31/2021, are still required to be amortized over 5 years (15-year period for foreign expenditures). The only way this treatment will change is if Congress enacts a new law to change to current treatment of research and experimental expenditures.
It should be noted that as of today’s date, a bipartisan bill changing the amortization treatment above is currently in the Senate’s corner. The bill (H.R. 7024) was passed by the House of Representatives in early February.
The bill delays the amortization requirement until taxable years beginning after 12/31/25. In essence, current expensing would be permitted not only for 2023, but also for returns already filed for 2022.
However, the Senate has yet to take any action on the bill. The lack of action and the approaching entity tax return deadline on March 15th has created significant uncertainty as to whether and when the bill, in any form, will be taken up by the Senate during tax season. Even passing the bill at this point would result in a significant amount of amended returns and place a significant burden on taxpayers and the Internal Revenue Service, the burden of which will increase daily as we go through the tax filing season.
The looming legislation has put affected taxpayers in an increasingly uncomfortable position as we approach the individual and corporate deadline on April 15th, when any tax due for the 2023 tax year must be paid. We recommend that you work with your AGP representative to determine the appropriate position on your tax return, which may result in assuming the amortization treatment will remain for the 2023 tax year.
Deductions and credits related to research activities are one of the more complicated areas of the tax law. For questions related to either of the updates above, please reach out to your AGP representative.
While there still remains a possibility that some form of the bill will eventually pass, the prospects of the bill passing in its current form become less and less as we approach the due date of calendar year pass-through entity returns (March 15th).
Given the fact that the Senate has yet to address the bill, and we are now approaching the due date of calendar year pass-through entity returns.
It is uncertain as to whether or when the bill will be taken up by the Senate, or even be taken up by the Senate in its current form.