Important developments to Section 41 research credit claims

The IRS recently released new guidance relaxing the information burden for research credit refund claims and a revised draft Form 6765 that walks back some of the unpopular aspects of earlier draft versions. Although these two recent developments are generally favorable, the relief is limited and the issues underscore the evolving documentation and substantiation requirements for Section 41 research credit claims.

Effective as of June 18, 2024, the IRS added FAQ #21 to its guidance for taxpayers filing a research credit refund claim, reducing the informational burden for refund claims. In accordance with FAA20214101F, taxpayers seeking a refund claim are required to produce five items of information:

1. Identify all the business components to which the Section 41 research credit claim relates for that year
2. For each business component, identify all research activities performed
3. For each business component, name the individuals who performed each research activity
4. Provide the information each individual sought to discover
5. Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year

New FAQ #21 waives the requirement for taxpayers to provide the names of the individuals who performed each research activity and the information each individual sought to discover (i.e., Items #3 and 4).

The IRS also released a revised draft Form 6765 on June 21, 2024, for review by taxpayers and practitioners. The draft form addresses a variety of comments received by the IRS on a previous draft intended to reduce taxpayer burden.

Noteworthy revisions to the additional information requirements of Section G Business Component Information include:

• Section G is optional for qualified small business taxpayers that claim a reduced payroll tax credit and for taxpayers that have Qualified Research Expenditures (QREs) equal to or less than $1.5 million and gross receipts equal or less than $50 million (determined at the controlled group level).
• The scope of of business component details required to be provided is reduced:
  • Taxpayers are only required to report 80% of total QREs in descending order by the amount of total QREs per business component. Taxpayers with a significant amount of business components are not required to report more than 50 business components.
  • The IRS eliminated the requirement to indicate whether a business component is new/improved, or a sale/license/lease.
  • For original returns, taxpayers are no longer required to provide a narrative that describes the information sought to be discovered for each business component.

According to the IRS news release, forthcoming instructions will provide additional clarification, including definitions for officers, controlled group reporting and business component descriptive names. While the revised Section G is optional for all filers for tax year 2024, the Section E Other Information and Section F Qualified Research Expenses Summary will be required for tax year 2024.