Jamie Overberg wraps up the year with an overview of the significant changes the IRS has introduced to improve transparency and detailed reporting for research credits this year.
IRS actions this past year reflect a trend towards more transparency and detailed reporting to prevent abuse of research credits while ensuring businesses receive lucrative credits for qualifying R&D activities. In the past year, the IRS’s ongoing efforts to refine how companies report and claim these incentives has seen four notable changes.
Form 6765. Draft changes to Form 6765 used for claiming the R&D credit include:
- Two new sections (E and F) that request more detailed disclosures about business components and associated research costs.
- Additional disclosures to aid in compliance with Section 280C elections and control issues.
These changes are set to take effect in 2024 but watch for updates as implementation may be pushed back. Since 2010, our deliverable provides the information the IRS new form demands; so, don’t panic. We’ll be able to cover these changes whenever they become effective for our clients.
Section 174. Amortization of research expenses, Section 174, has been a hot button for a couple years now since first introduced in TCJA of 2017. Interim guidance under Notice 2023-63 addresses how companies should amortize and capitalize specified research or experimental expenditures. However, it failed to address all the issues leaving some items subject to interpretation.
Increased scrutiny. These increased reporting requirements for businesses planning to claim the credit in 2024 mean implementing more robust monitoring and tracking processes for gathering contemporaneous documentation. The IRS’s stricter compliance expectations around nexus and documentation to support credit claims has revealed that not all R&D advisors are alike in their processes and conclusions. Some more aggressive R&D advisors have been exposed in this era of greater transparency, which is naturally weeding out some bad apples and is good for the industry as a whole.
Uncertain tax position. The IRS is actively sending letters to people that aren’t providing enough description in reporting their research credit on the uncertain tax position form. The IRS is basically asking for an audit road map, which is extremely precarious. If you have received a notice, contact us directly. We can assist in drafting a response that fulfills the IRS criteria while minimizing risk.
Year-end Wrap
Between additional reporting requirements and Section 174 capitalization, there are several proactive steps you can take to get ahead of the risks and minimize the pain. To minimize capitalization impact, now is a good time to have internal meetings with your accounting group to make sure you have fully investigated the following to highlight any larger issues: costs, capitalization already being done, funding or reimbursements, and rights and risks matters.
Investing time in evaluating your current information to ensure it meets IRS requirements is essential to identifying and addressing any gaps. Often conversations with the engineering group allows you to collect and retain good data now which saves you time, effort and stress if audited two or three years later.
We are here to help position taxpayers for a smoother filing season. Get in touch now.
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