Over 14,000 businesses in the U.S. claim the federal research and development tax credit every year, so businesses relying on this funding need to be aware that the claiming process has recently changed.
The Internal Revenue Service has made significant changes to Form 6765, "Credit for Increasing Research Activities," with new requirements set to take effect this tax year. These revisions emphasize enhanced qualitative reporting and will impact how businesses file for the credit. The final versions of the form and instructions were published in February, and accountants should begin preparing now to ensure compliance.
Historically, companies have used Form 6765 to report numerical, quantitative data. But the revised form now requires businesses to include much more qualitative data directly with the tax return to explain what the claim is for. 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:
Preliminary questions before Section A
Before completing Section A, taxpayers must now answer two key questions:
- 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.
- 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.
New Sections E, F and G
The IRS has also introduced three 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, helping ensure compliance with the four-part R&D test;
- Officer compensation included in the wage qualified research expenditures;
- Acquisitions and dispositions that may impact the R&D credit calculation, ensuring 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; and,
- 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 QREs by type (e.g., wages, supplies, contract research), offering the IRS greater transparency into qualified R&D activities.
Section G – Business Component Information
The biggest change is the introduction of Section G, which will require taxpayers to disclose detailed information about their business components. 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, and taxpayers with QREs 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.
Taxpayers must report at least 80% of total QREs, listed in descending order by amount, with a maximum of 50 business components. Each business component must include:
- Identification details (e.g., company name, unique identifiers);
- The type of business component, categorized as a product, process, formula, invention, software or technique.
Special treatment for software R&D
Companies developing software will now be required to classify business components into one of the following categories:
- Internal use software;
- Dual function software;
- Non-internal use software (developed for commercial sale or third-party interaction); and,
- Exceptions from IUS treatment, if applicable.
Additionally, taxpayers must provide detailed reporting, including:
- The specific information sought to be discovered through R&D activities;
- Wage breakdowns by three qualified levels per business component; and,
- Costs associated with supplies, rental/lease of computers, and qualified contract amounts categorized by business components.
Implications for accountants
These changes reflect the IRS's increased focus on qualitative R&D information, potentially leading to greater scrutiny of claims. Accountants and tax professionals should be aware that the additional reporting will increase administrative burdens, particularly for businesses with complex R&D activities. Some key considerations include:
- Documentation will be critical. With the IRS requiring more detailed reporting, taxpayers must maintain thorough records of their research activities, costs, and business components.
- More preparation time will be needed. The expanded reporting requirements mean tax preparers should allocate additional time to gather and verify required data before filing.
- Greater IRS oversight. Increased transparency could lead to heightened audits or examinations of R&D claims, making accuracy and compliance even more essential.
Educating clients
Many businesses may not be aware of these changes. Proactive communication will be necessary to ensure clients understand what's required and avoid last-minute surprises during tax season.
The IRS's proposed updates to Form 6765 represent a shift toward greater transparency and compliance enforcement for R&D tax credit claims. While these changes will require taxpayers and accountants to adapt, early preparation and proper documentation can help businesses continue benefiting from this valuable incentive.
As Section G becomes mandatory for most taxpayers in 2025, now is the time for accountants to review these updates, educate clients and refine documentation processes to ensure seamless compliance with the new requirements. By staying ahead of these changes, tax professionals can help businesses maximize their R&D credits while minimizing audit risks.
