Innovation is the lifeblood of manufacturing – between new products, enhancements, and production efficiency improvements, manufacturers are often performing research and development on a regular basis to keep up with (or stay ahead of) competitors. The federal Credit for Increasing Research Expenses, often referred to as the R&D Credit, can help offset some of the expenses associated with these efforts. While the R&D Credit is familiar territory for many manufacturers, there are a few points to keep in mind as the calendar turns to 2025.
New disclosures required for credit claims:
The IRS released a draft version of the R&D credit Form 6765 that adds two pages for three new Schedules: E, F, and G. The revised form is subject to final government review but is expected to be in use for the 2024 tax year.
- Schedule E is a series of questions meant to gather information on common areas that arise during R&D audits, as well as identify the number of business components generating the claimed Qualified Research Expenses (QREs).
- Schedule F is required for those not completing Schedule G and is used to report total amounts of QREs by category – filers will recognize that this section is nearly identical to how they’re used to reporting QREs on the old version of the form.
- Schedule G is optional to complete for 2024 and becomes required for the 2025 tax year, however many taxpayers will be excepted from mandatory reporting, including:
- Qualified Small Business taxpayers that elect to claim the research credit as a credit against payroll taxes, or
- Taxpayers that on a controlled group basis report $1.5 million or less of QREs and gross receipts of $50 million or less.
In Schedule G, taxpayers are asked to share information that previously was only required to be attached to amended R&D claims or produced for IRS inquiries. On it, taxpayers must list their research projects by business component, including a short description of what was sought to be discovered, and the QREs, by category, that were incurred for that component and project.
Capitalization of research expenses remains in effect:
Section 174 requires research expenses to be capitalized and amortized for tax purposes, effective for tax years beginning after Dec. 31, 2021. While there was much speculation that Congress would act to alleviate the burden of Sec. 174 – possibly even retroactively – it is still the law of the land. Manufacturers should keep in mind that applying Sec. 174 is not optional and must be done regardless of whether an R&D credit is claimed.
The IRS recently announced a new enforcement campaign related to the proper use of Form 8275, Disclosure Statement, which is used to alert the IRS to return positions that the taxpayer has reasonable basis to assert, and in return the taxpayer can avoid associated accuracy and underpayment penalties. The IRS reminds taxpayers that “Form 8275 is not intended as a free pass on penalties for positions that are false,” and specifically called out taxpayers who filed Form 8275 stating that they chose to disregard Sec. 174 and wait and to see if the law would be changed.
As we move into the new administration in 2025, manufacturers can keep an eye out for possible Sec. 174 legislation, while continuing to fine tune their processes for accounting for research expenses under this provision.
Notable R&D credit decisions in 2024:
There were a few court decisions involving the research credit this year, specifically involving funded research, the exclusion of research related to adaptations of an existing business component for a particular customer, and production of pilot/prototype models. Manufacturers involved in these areas should familiarize themselves with these decisions and evaluate impacts to their credit methodologies.
Steps to take in 2025:
Determine whether Schedule G may be required for your organization – the control group and small business definitions are nuanced and may need to be evaluated by a professional. If the conclusion is that your company will be (or might be) subject to the added reporting on Schedule G for 2025 or future years, it’s important to revisit your documentation process for tracking research projects and their associated costs. While most manufacturers monitor the costs associated with their research efforts, they may be lacking in the crucial step of linking the expenses to specific projects or business components. Even if Schedule G is optional, it’s always time well spent to revisit documentation to ensure you’re audit ready. As part of the exercise, it helps to involve the engineering and manufacturing side of the business – they can often provide solutions to enhance documentation of their work and may even identify research activities that haven’t been captured. If you find it’s time for a revamp or a fresh set of eyes, a formal credit or 174 study may be necessary to maximize tax benefits while remaining compliant.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
