Form 6765, Research & Development, AI and the Power Grid
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Tax Policy/News:
The Internal Revenue Service (IRS) announced the release of the draft Form 6765, Credit for Increasing Research Activities, also known as the Research Credit, incorporating feedback from external stakeholders to reduce taxpayer burden.
Key changes include the optional reporting of Section G for Qualified Small Business taxpayers and those with qualified research expenditures of $1.5 million or less and gross receipts of $50 million or less.
The IRS reduced the number of business components that need to be reported in Section G, requiring 80% of total QREs in descending order by business component but no more than 50.
Additional revisions include eliminating certain details and simplifying instructions. Section G will be optional for all filers for tax year 2024 and mandatory for tax year 2025.
The IRS had previously sought feedback on these changes in a preview released on September 15, 2023.
The IRS has announced plans to deny tens of thousands of high-risk Employee Retention Credit (ERC) claims following a detailed review that identified widespread improper claims.
This review revealed that 10-20% of ERC claims are high-risk and clearly erroneous, while 60-70% show significant risk indicators.
The IRS will begin processing lower-risk claims and issuing payments to eligible taxpayers at a slower pace, prioritizing older claims.
This action follows the agency's concerns about aggressive marketing leading to improper claims and ongoing efforts to improve compliance, which have already led to over $2 billion in compliance actions.
The IRS continues to urge caution and vigilance among taxpayers and will keep the moratorium on ERC claims submitted after September 14, 2023, consulting with Congress on potential legislative actions to address the situation.
June 18: IRS relaxes R&D tax credit refund claim requirements
The Internal Revenue Service (IRS) is easing the documentation requirements for claiming a tax refund related to the research and development (R&D) tax credit.
Starting from June 18, 2024, taxpayers no longer need to provide the names of individuals who performed each research activity and the specific information each individual sought to discover when filing for a refund involving the Research Credit.
However, the IRS may still request this information if the claim is selected for examination. Taxpayers are still required to identify all business components related to the Section 41 research credit claim, detail all research activities performed for each component, and provide total qualified employee wage expenses, supply expenses, and contract research expenses for the claim year using Form 6765.
This change follows complaints about the extensive documentation requirements established by a 2021 IRS Chief Counsel memorandum, which aimed to provide clarity on the necessary information for R&D credit claims but led to increased scrutiny and was frequently cited as a common tax scam.
Economic News/Policy:
June 25: To Lead In Education R&D, The U.S. Must First Invest In It
Despite bipartisan calls for America to lead in innovation, the federal government invests only $40 per student—about 2.6% of per-student spending—in education research and development (R&D), according to the Alliance for Learning Innovation.
This underfunding contrasts sharply with the $37,000 spent per American service member on defense R&D.
With declining student test scores and inadequate preparation for tech-forward careers, the need for increased investment in education R&D is critical.
Programs like the Institute of Education Sciences' (IES) Accelerate, Transform, and Scale Initiative, which funds AI-driven personalized learning projects, show promising early results but need more support.
The report suggests Congress should boost funding for education R&D, establish a DARPA-like center for advanced education research, and ensure the Office of Management and Budget publishes data on federal education R&D investments.
Such measures could transform education, fostering innovation and preparing students to become future global leaders.
June 24: House set to dive into spending bills
The House is progressing with fiscal 2025 government funding by advancing three spending bills for the departments of Homeland Security, State, Defense, and Foreign Operations, despite opposition from House Democrats and anticipated rejection in the Senate.
The goal is to strengthen negotiations with the Senate over government funding. To date, only the military construction and Veterans Affairs appropriations bill has passed the House.
With a September 30 funding deadline approaching, a short-term stopgap bill is expected to delay the deadline until after the November elections.
Concurrently, notable celebrities including Michael Phelps, Paris Hilton, and Randy Travis will testify before various House committees on topics ranging from anti-doping measures to the abuse of foster youth and music copyrights.
June 20: Individual Taxes Would Surge 10 Percent if TCJA Expires, CBO Says
The Congressional Budget Office (CBO) projects a significant increase in individual income tax collections in 2026 and 2027 if the 2017 Tax Cuts and Jobs Act (TCJA) provisions expire as scheduled at the end of 2025.
Tax collections from individuals are expected to surge by 11% in 2026 and 10% in 2027, leading to an overall rise to $3.1 trillion by 2027.
This growth is attributed to the expiration of tax cuts, a halving of the standard deduction, and changes in estate tax thresholds, alongside inflation-related bracket creep and ongoing immigration.
The new forecast also highlights increased deficits, projecting a rise to $2 trillion for 2024, driven by factors such as student loans, Medicare payments, and support for international allies.
Over ten years, the deficit is now expected to reach $22.1 trillion, up from $20 trillion, with higher anticipated tax collections partly offsetting this increase.
Technology:
June 21: AI is exhausting the power grid. Tech firms are seeking a miracle solution.
The Columbia River, historically a source of hydroelectric power, is now the focus of Microsoft's ambitious plan to harness atomic fusion energy by 2028.
This effort aims to address the rising electricity demands of AI data centers, which have led to increased fossil fuel use, delaying the retirement of coal-fired plants. Microsoft, alongside other tech giants, is investing in experimental clean energy projects, including small nuclear reactors and geothermal energy, to mitigate the environmental impact of AI's voracious energy consumption.
Critics, however, argue that these companies are using "fuzzy math" in their climate claims, as their operations continue to rely heavily on the existing power grid, necessitating fossil fuel expansions to stabilize energy supply.
Despite the skepticism of physicists who doubt the feasibility of commercial fusion by 2030, Microsoft is pressing ahead, driven by the belief that breakthroughs in energy are achievable and crucial for their sustainability promises.
The tech giants are also accused of exacerbating global warming by reinvigorating coal plants and relying on natural gas to meet their growing power needs, overshadowing their clean energy investments.
This complex scenario underscores the challenges of balancing the rapid growth of AI technology with genuine environmental stewardship.
June 18: Fuel generative AI investment with R&D tax credits
In the rapidly evolving tech landscape, businesses seek competitive advantages through generative AI, which fosters innovation, efficiency, and market leadership.
However, the cost and uncertainty of integrating this advanced technology can be a barrier for early adopters. While large companies with ample funds are investing heavily in AI, smaller businesses can also benefit from relatively inexpensive AI projects that work with existing systems.
Many of these projects may qualify for Section 41 R&D tax credits, offsetting development costs. To maximize the return on investment, businesses should methodically choose the right AI solutions and partners, considering potential tax incentives.
Generative AI can enhance cost efficiency, personalization, go-to-market timelines, quality, and customer experience, even if not all applications qualify for R&D credits.
Strategic planning and leveraging R&D tax credits can help businesses mitigate financial risks and position themselves as leaders in a tech-driven economy.
Energy and Environmental Policy/News:
June 18: Biden administration announces tax breaks to push higher pay for green energy workers
The Treasury Department has finalized rules under the Inflation Reduction Act (IRA) for prevailing wage and registered apprenticeships, allowing qualifying employers in the renewable energy sector to receive a fivefold increase in tax credits.
Employers must pay the prevailing wage to be eligible for the increased credit. Most IRA renewable energy projects are located in counties with median household incomes below the national average.
Acting Labor Secretary Julie Su emphasized that these rules ensure fair wages and training opportunities for workers, aligning with the administration's goal to share the prosperity of a clean energy future.
The Biden administration promotes renewable energy jobs as beneficial to workers, countering Republican claims that such jobs would harm the energy sector.
Senate Finance Chair Ron Wyden praised the rules and highlighted their importance for the 2024 election, asserting that Republican control could jeopardize climate and energy reforms.
For Fun:
June 24: How to make an EV tire that won’t pollute the environment
Since the Clean Air Act of the 1970s, significant reductions in cancer-causing particulate emissions from cars have added years to our lives. However, in the electric vehicle (EV) era, tire wear has emerged as a major source of particulate emissions.
To address this, Enso, founded by Gunnlaugur Erlendsson in 2016, aims to produce eco-friendlier tires specifically for EVs. Enso plans to build a $500 million tire factory in the US, targeting locations like Colorado, Nevada, Texas, or Georgia.
These tires promise 10% lower rolling resistance, a 35% increase in tire life, and the use of recycled materials, although they still contain the controversial preservative 6PPD.
Enso's business model focuses on the aftermarket, selling directly to consumers rather than just partnering with auto manufacturers.
This approach contrasts with traditional tire companies, which prioritize higher sales volumes, potentially revolutionizing the tire industry by promoting sustainability and efficiency.