Update on IRS Changes to Form 6765
On January 12, 2023, the Internal Revenue Service (IRS) released new draft instructions to the Federal Form 6765, the Credit for Increasing Research Activities. The draft instructions contain updates regarding:
- Disclosure requirements that apply to taxpayers filing amended claims for refund of the Internal Revenue Code (IRC) Section 41 research credit (the R&D Credit).
- Guidance on how prior year R&D credit claims should be processed for Bipartisan Budget Act (BBA) partnerships within the context of the Administrative Adjustment Regime (AAR).
The IRS is currently welcoming feedback on the draft form instructions.
Since January 11, 2022, taxpayers have been required to file an informational disclosure with an amended claim for refund of an R&D credit. The draft instructions refer to these rules. Specifically, when filing an amended claim for refund, the IRS requires the disclosure of:
- The factual basis of the taxpayer’s IRC Section 41 research credit claim.
- The research activities performed.
- The individuals who performed early research activity.
- The information each individual sought to discover.
- The total qualified employee wage expenses, total qualified supply expenses and total qualified contract expenses paid or incurred for IRC Section 41 research credit claim or Form 6765 completion.
If the five items are not provided, then the IRS will not process the amended claim for refund. The draft instructions also indicate that another document may be submitted instead of the disclosure statement (e.g., a research tax credit study prepared by a third-party CPA firm), if it accompanies something that references exactly where each item appears in that document. It is possible that additional clarifications on this point will be provided in the final instructions.
The draft Form 6765 instructions remind taxpayers of the process to follow for BBA Partnerships. BBA Partnerships cannot file amended returns but instead, must file under the AAR. This is a statutorily provided type of amended filing used to change partnership-related items for any partnership taxable year.
For partners of a BBA partnership that file a return including an IRC Section 41 research credit claim, the BBA Partnership files for administrative adjustment request (with disclosure of five items) in its administrative adjustment filing– then submits Form 8985 and Form 8986 to the IRS. Form 8986 is also provided to the partner and is the rough equivalent of the K-1. The five items are not attached to these forms because the BBA partnership would have already disclosed them in its administrative adjustment filing. In this context, the individual partner does not need to file the disclosure on its amended returns.
While these proposed updates to the Form 6765 instructions are not controversial, they reflect the fact that the rules regarding the R&D credit require more documentation then required in prior years. It will be interesting to see if other changes to the Form 6765 or the related instructions specific to the reduced credit (IRC Section 280C) are announced later by the IRS, due to the requirements under IRC Section 174 to capitalize and amortize expenses related to research and experimentation.
R&D Tax Credits: 2022 Year in Review