As companies continue to invest in innovation, tax leaders should be aware of recent and potential future changes to R&D tax policy, including proposed changes to the R&D tax credit reporting requirements and ongoing guidance regarding the capitalization of certain R&D costs. Tax leaders must understand how these changes might impact their businesses and be prepared to keep their C-suite informed as the landscape changes. This article provides a short summary of current tax policies related to R&D.
Changes to Section 174 R&D Cost Amortization
The changes to Internal Revenue Code Section 174, implemented as part of the Tax Cuts and Jobs Act (TCJA) of 2017, have significantly impacted many companies, most notably partnerships and historical loss/net operating loss taxpayers involved in development activities.
- Latest Update: Proposed regulations were released in September 2023, with procedural guidance following in December 2023.
- Effective Date: January 2022
- Key Considerations
- No additional changes are anticipated for the 2023 tax year, despite some traction in Congress in early 2024.
- Taxpayers who have complied with the law under Section 174 law should continue to do so.
- Taxpayers who haven’t yet addressed these changes should work with a credible advisor to review current and prior year calculations.
- Learn More:
- IRS Releases Revised Procedural Guidance for Section 174 R&E Costs
- IRS Releases Substantive Guidance for Section 174 R&E Costs
Proposed Changes to R&D Tax Credit Reporting Requirements
The IRS has proposed changes to Form 6765, Credit for Increasing Research Activities, which is used to claim the credit provided under Section 41. The new form would require additional information on a timely filed return from taxpayers effective for tax year 2024. It also includes expanded requirements for tax year 2025.
- Latest Update: The IRS held a roundtable in July 2024 to discuss the proposed changes to Form 6765. BDO was invited to participate to provide feedback on behalf of its clients.
- Effective Date: Tax year 2024
- Key Considerations
- These changes will impact companies with qualified research expenditures in 2024 that intend to file Form 6765.
- The revised form requires additional information on methodology, business components, substantiation, and officers prior to the tax filing deadline.
- Based on discussions during the July 2024 roundtable, the IRS seems to be planning to move forward with adoption of the revised draft Form 6765 released in early 2024. Draft instructions are expected to be released in December 2024.
- Finding a strategy for documentation gathering is key to avoid tax filing delays, so it’s important to consult with an advisor during tax planning.
- Learn More
- IRS Issues Revised Draft Form 6765, Credit for Increasing Research Activities
- Preparing for Changes to R&D Tax Credit Form 6765: A Discussion With the IRS
Changes to R&D Tax Credit Refund Claim Requirements
The IRS announced five required items of information that taxpayers must provide when submitting research credit refund claims in October 2021. For taxpayers looking to file a tax return to apply for a refund for a previously filed Form 6765, those requirements resulted in an increased burden for taxpayers.
- Latest Update: In July 2024, the IRS updated the FAQs on refunds related to the research credit on amended tax returns.
- Effective Date: October 2021
- Key Considerations
- The update simplifies the required information, reducing the need for specific employee data.
- BDO finds that this is consistent with the proposed changes related to Form 6765.
- Learn More
- IRS Updates Requirements for R&D Tax Credit Refund Claims