By Deborah Roth, CPA
The Research and Development (R&D) Tax Credit remains one of the most valuable incentives for businesses investing in innovation. However, the Internal Revenue Service has recently made significant changes to Form 6765. These revisions emphasize enhanced qualitative reporting and will impact how businesses file for the credit. With additional reporting requirements and heightened scrutiny from the IRS, CPAs and other tax professionals must stay ahead of these updates to help clients maximize their credits while avoiding costly errors.
Let’s take a look at what these key changes are and what accountants and taxpayers need to be aware of.
Key changes to Form 6765: Increased reporting requirements
The IRS has modified Form 6765 to include qualitative information related to taxpayers’ technical endeavors. The IRS stated that the goal of these updates was to provide taxpayers with a more consistent, predefined format while improving the information received for tax administration requiring taxpayers to provide quantitative and qualitative business component details, which have never previously been required.
Accurate documentation ensures businesses’ tax credit claims are well-supported and reduces the risk of IRS scrutiny or audits. The changes to the form include:
New Section G: Business component information
The most notable addition to Form 6765 is Section G, which requires several categories of info about the taxpayer’s business components (i.e., the products, processes, etc. for which the credit is being claimed). The IRS is phasing in mandatory reporting:
- For tax year 2024: Completion of Section G is optional for all taxpayers.
- For tax year 2025: Section G will only remain optional for:
- Qualified small businesses claiming the payroll credit.
- Taxpayers with qualified research expenses of $1.5 million or less (determined at the controlled group level) and gross receipts of $50 million or less, provided they are claiming the research credit on an original return.
In response to feedback, the IRS reduced the number of business components that must be reported on Section G. As currently proposed, taxpayers should report 80% of their total qualified research expenses in descending order per business component but no more than 50 business components in total. However, taxpayers will need to list the total number of business components being claimed on Line 37 of Section E.
Preliminary questions before Section A
Before completing Section A, taxpayers must now answer two key questions:
1. Controlled group status: Determine whether the organization is part of a controlled group or under common control. This is crucial because R&D credit limitations and aggregation rules apply at the group level, which could impact the total credit available.
2. 280C election box: Indicate whether the taxpayer is electing the reduced 280C credit, which allows companies to claim the R&D credit without reducing their deductible expenses by the credit amount.
Additional form sections added: Sections E and F
The IRS has also introduced additional sections to enhance reporting and transparency.
Section E: Other information: Taxpayers must now provide detailed information, including:
- Number of business components used in the credit calculation. This helps ensure compliance with the four-part R&D test.
- Officer compensation included in the wage qualified research expenses.
- Acquisitions and dispositions that may impact the R&D credit calculation, ensuring that changes in business structure are properly reflected.
- New categories of expenditures added to the current year’s QREs to identify inconsistencies year over year in credit claims.
- Use of the ASC 730 Directive, which is relevant for companies with assets over $10 million using certain financial reporting methods.
Section F: Qualified research expenses summary: This section mandates that taxpayers:
- Indicate whether they are required to complete Section G.
- Provide a breakdown of qualified research expenses by type (e.g., wages, supplies, contract research), offering the IRS greater transparency into qualified R&D activities.
New Software R&D classification requirements
Companies engaged in software development will need to pay close attention to changes in how their R&D activities are classified. The IRS now requires businesses to categorize software components into one of three distinct classifications: internal-use software, dual-function software, or non-internal-use software, which is developed for commercial sale or third-party interaction.
Certain exceptions to internal-use software treatment must also be documented, and businesses must provide detailed information on research activities, wage allocations, and related expenses. This adjustment ensures that only qualified software-related R&D expenses are claimed and reduces ambiguity in the reporting process.
Implications for CPAs
The increased level of detail required in Form 6765 presents several challenges for CPAs and tax professionals. Perhaps the most immediate concern is the burden of documentation needed and included within the tax return. The IRS now expects extensive records explaining the nature of R&D activities, the methodologies employed, and how expenses were allocated. This means that accountants must work closely with clients to maintain well-documented records throughout the year.
More preparation time needed: The increased complexity of the form means that tax preparers will need to invest more time in gathering, verifying, and organizing data before submitting claims. The days of straightforward R&D credit filings are largely over; now, CPAs must take a proactive approach to avoid delays and potential compliance issues.
Greater IRS oversight: Another implication is the potential for heightened IRS scrutiny. By requiring more qualitative data, the IRS gains deeper insight into R&D tax credit claims, which could lead to more frequent audits and examinations. Accountants must be prepared to defend claims, ensuring that all filings are both accurate and compliant.
Client education: Client education will also play a crucial role in adapting to these changes. Many businesses may be unaware of the new reporting requirements, making it essential for accountants to communicate these updates early and help clients implement proper record-keeping systems. Clear guidance and advanced preparation will be key to ensuring a smooth tax season.
The IRS’s revisions to Form 6765 mark a significant shift in how R&D tax credits are claimed and scrutinized. With the introduction of new reporting requirements and the eventual mandatory completion of Section G, businesses and their accountants must take a proactive stance to ensure compliance.
CPAs should take some time to become familiar with the new format of the Form 6765. Clients with qualified research expenses should be made aware of the details that are required to be included on Form 6765 and make sure they have the proper processes and documentation in place to be compliant when all sections of the new form become required next year.
By staying ahead of these changes, accountants can help businesses maximize their R&D credits while minimizing the risk of IRS audits and compliance issues. As the landscape of R&D tax credits continues to evolve, preparedness and strategic planning will be the keys to success.
ABOUT THE AUTHOR:
Deborah Roth, CPA, is managing director of R&D Tax at Source Advisors. She joined Source Advisors as the managing director of R&D Tax Credits in 2009. Formerly with PwC and another boutique R&D tax credit firm, Roth has overseen more than 4,500 R&D tax credit studies in the over 20 years that she has focused solely on R&D tax credits. She holds a BBA and Master of Accountancy from the University of Michigan School of Business. She is also a founding member of the National R&E Roundtable.
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Tags: Form 6765, IRS, R&D tax credit, Small Business, tax credits, Taxes
