Unless your returns are on extension, 2023 tax returns are now a thing of the past. We are aiming your sights on 2024 and there’s a significant potential change that may impact your R&D credit claims for costs you are incurring (currently) in 2024.

Before we hop into the R&D credit claim proposed changes, as of the release date of this article, mandated capitalization and amortization (under Section 174) of R&D costs are still in place. It has been a significant challenge for early-stage companies and small businesses, in general, to adjust to these new requirements even though we are two years into these effective changes. While the House passed the Tax Relief for American Families and Workers Act of 2024 containing relief from these requirements, the bill has yet to pass the Senate. This bill, as proposed, could retroactively delay the Section 174 R&D capitalization requirements until 2026 for domestic costs, while foreign costs would still be subject to capitalization and amortization.

Although there hasn’t been a change to Section 41 of the Code (the provision authorizing R&D credits), the IRS did release a revised Form 6765, Credit for Increasing Research Activities, which could be in effect as early as the 2024 tax year. The proposed Form will expand from 2 to 4 pages and most notably include Section F – Business Component Information. Taxpayers will be required to bifurcate qualified research expenses (QRE’s) by component for reporting on Form 6765 for their R&D credit claims, in addition to answering other informational questions (such as Section E).

A business component, as defined in Section 41, is any:

product;

process;

computer software;

technique;

formula; or

inventory which is to be:

held for sale; lease; or license; or

used by the taxpayer in a trade or business of the taxpayer. 

In prior years, reporting to this level of detail on a business component basis was not required on Form 6765, and therefore may require additional information to be identified and accumulated in your records. We strongly encourage clients to continue to analyze their R&D expenses by business component or activity and to have a framework in place to provide this information to us concisely, in the event the proposed Form 6765 is adopted and required for the 2024 tax year.

Our team is prepared to assist with questions you may have and discuss both the Section 174 and 41 impact, including the proposed Form 6765 changes, with you. For additional information from the IRS and the proposed Form, you can visit: https://www.irs.gov/pub/irs-lbi/form-6765-proposed-changes-fy24.pdf

Louis Sierra, CPA, MST, Tax Supervisor at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.