New Reporting Requirements for the Research and Development Tax Credit

On June 21, 2024, the Internal Revenue Service (IRS) issued additional guidance on its proposed changes to claiming the Research and Development (R&D) tax credit, which will impact manufacturers and businesses alike.

As a background, the R&D tax credit is available to manufacturers performing eligible activities within their business, intending to incentivize innovation and the development of new or improved products and processes. The credit is claimed on Form 6765, “Credit for Increasing Research Activities.” Examples of eligible activities within the manufacturing industry are as follows:

• • Developing new or improved quality assurance testing processes
  • Improving the service life and quality of products
  • Developing automated technology (including Artificial Intelligence)
  • Determining the optimal placement of equipment
  • Experimenting with new packaging techniques

It is common for a manufacturer to engage in R&D activities, and the related tax credit can be lucrative and drive down an entity’s tax liability each year. However, new disclosure requirements are making it more important than ever to maintain contemporaneous documentation on the R&D activities performed by your manufacturing business.

Starting with tax year 2024, businesses must report additional information on Form 6765 to claim the R&D tax credit, including but not limited to:

• • The number of business components generating Qualified Research Expenditures (QRE)
  • Officers’ wages included as QREs
  • New categories of expenditures as current year QREs

Starting with tax year 2025, businesses must report the following information, in addition to the above, for each business component that performs qualified research activities:

• • A description of the business component
  • Direct research wages for qualified services
  • Direct supervisor wages for qualified services
  • Direct support wages for qualified services
  • Cost of supplies
  • Rental or lease cost of computers
  • Contract research expenses

Previously, none of this information was required to be disclosed to claim the tax credit. While some of these new disclosures are not required until 2025, it’s important to put procedures in place now to effectively track the different business components that generate R&D tax credits. For example, if your company is working on developing two new internal processes or products, it’s more crucial than ever to track these separately. This includes tracking the employees who work on them, what amount of their time is allocated towards them and the cost of supplies and contract expenses that are included in each.

If you haven’t been doing so, now is the time to review your internal R&D activities and ensure you are accounting for them separately and accurately in preparation for the changes ahead.

Contributing author: Anthony J. Cerchia, CPA, is a tax senior manager at Dannible & McKee, LLP. Anthony has over eight years of experience providing tax planning and ownership transition analysis to a wide range of clients, specifically within the construction, manufacturing, automotive, architecture and healthcare industries. For more information on this topic, contact Anthony at acerchia@dmcpas.com or (315) 472-9127.