The IRS has introduced significant changes to Form 6765 – Credit for Increasing Research Activities, the form businesses use to claim the Research and Development (R&D) tax credit. The updated version includes new requirements for both quantitative and qualitative data, meaning businesses must provide additional information related to their R&D activities. These updated requirements impact how businesses track R&D expenditures and how tax professionals substantiate R&D activities.
Companies that leverage the R&D tax credit to offset innovation costs should start preparing now to comply with the new documentation standards.
Form 6765 explained: Why the R&D tax credit update matters
The federal R&D tax credit is an incentive designed to encourage innovation and technological advancement through reduced tax liability. Businesses claim this credit by filing IRS Form 6765, which the IRS recently updated to require more detailed reporting. While the credit is commonly associated with technology and scientific research, it actually applies to a wide range of industries, including manufacturing, construction, healthcare and financial services.
With this tax credit, businesses can reduce their tax liability by offsetting qualified research expenses (QREs) such as employee wages, contract research and supply costs. The recent changes to Form 6765 by the IRS are intended to promote increased transparency and prevent improper claims.
What's new with Form 6765?
The new Form 6765 applies for tax years beginning in 2024 and introduces three new sections: Section E, F and G. While Sections E and F are mandatory for tax year 2024, Section G is optional for tax year beginning before 2025 but will become mandatory for tax years beginning after 2024.
Section E
Under the new Section E, taxpayers will now have to report the following information:
- The number of business components generating the qualified research expenditures (QREs)
- The amount of "officers' wages" included in the total wages for qualified services
- Any acquisition or disposition of a major portion of a trade or business in the tax year
- Any new categories of expenses included in the year's QREs
An additional question also concerns taxpayers determining QREs following the ASC730 directive.
Section F
New Section F is a summary of the taxpayer's QREs breaking out the wages, supplies, contract research, rental or lease cost of computers and basic research costs for all business components. Taxpayers are also asked if they are required to complete Section G.
Section G
The new Section G will bring the most challenges to taxpayers and professionals. Businesses will be required to complete Section G unless:
- The company is a qualified small business and is electing to claim a reduced payroll tax credit; or
- The company has equal to or less than $1.5M in total QREs at the controlled group level and equal to or less than $50M in gross receipts for credits claimed on an original tax return.
For taxpayers that are required to complete the new Section G, the information now required includes a detailed breakdown of QREs per business component. A minimum of 80% of the total QREs will have to be presented but no more than 50 business components. A business component is generally a product, process, technique, or software on which qualified research activities are conducted. Each business component will have to be identified. Software business components will require an additional layer of identification to report if they are internal use (IUS), non-internal use, dual function software or excepted from the IUS treatment. Furthermore, taxpayers will now have to provide a breakdown of QREs per business component, including a breakdown of direct research wages, direct supervision wages and direct support wages.
In addition to these 3 new sections, the new Form 6765 also includes 2 questions at the top of the Form above Section A. Question "A" is now used to elect the reduced credit under Section 280C while Question "B" asks if the taxpayer is the member of a controlled group of business under common control.
What businesses should do now
To stay ahead of these changes, businesses should assess their current R&D tracking processes and make sure they align with the new requirements. Implementing stronger documentation practices is a key step to avoiding compliance issues. Such practices may include:
- Implementing real-time tracking systems for R&D expenses
- Tracking R&D expenses per project
- Developing standard contemporaneous templates to document R&D projects
- Ensuring close collaboration between tax and R&D teams to capture the necessary data
- Review documentation strategy with R&D tax professionals
Since the updated form places a heavier burden on businesses to justify their claims, early preparation is critical to maintaining continued eligibility for the tax credit. Working with tax advisors and R&D tax credit specialists will be essential. Businesses should review their previous claims to identify any potential documentation gaps and adjust their reporting strategies accordingly.
Technology can also help ease compliance challenges. Many businesses are leveraging automated expense tracking tools and R&D tax credit software to streamline the process of collecting and reporting data. Investing in these resources now could help businesses adapt to the IRS's new requirements more efficiently.
Stay ahead of R&D tax credit changes—Prepare your business today
With the IRS's changes to Form 6765 shifting the focus from just numbers to narratives, businesses must adapt their R&D documentation process to remain compliant. These changes also reinforce the importance of properly substantiating R&D tax credit claims.
By taking proactive steps now—consulting with tax professionals, evaluating documentation practices and implementing better tracking systems—businesses can mitigate compliance risks and continue benefiting from this valuable tax credit. Contact me or another member of Kaufman Rossin's Tax Credits & Incentives team to learn more about how you can prepare for the latest R&D tax credit changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
