Most businesses are aware of the Research & Development (R&D) Tax Credit. After all, it’s a federal incentive designed to encourage businesses to invest in innovation. It puts cash back in your pocket, by offering a dollar-for-dollar reduction in your federal tax liability for qualifying expenses. These include developing or improving products, processes, and software, creating prototypes or technical designs, as well as conducting engineering or scientific research.
But did you know that there’s been an update to the form you need to complete? The IRS has introduced significant revisions to Form 6765 (or Credit for Increasing Research Activities). In this blog, we’ll guide you through these changes, from why they were introduced, to how you can ensure you’re on the right track to saving on your federal taxes.
What’s Changed in the New Form 6765?
The changes to Form 6765 were introduced to enhance transparency and improve the quality of the information received by the IRS. They include:
- Expanded reporting requirements: You now need to provide detailed information about each component of your business generating qualifying research expenditures (QREs), using both quantitative and qualitative data.
- The addition of new sections: The revised form also includes new sections, to help standardize reporting for IRS review.
- Mandatory compliance by 2025: While some sections of the form are optional for the 2024 tax year, all new reporting requirements will become mandatory in the 2025 tax year.
Now let’s take a look at these changes in detail.
Structural revisions
Three new sections have been added to the form. They include Sections E, F and G.
Section E (or ‘Other Information’) is where you’ll fill in additional business details, like the number of business components that generate QREs, as well as information on officer wages included in wage QREs.
Section F (or ‘Qualified Research Expenses Summary’) lets you provide the IRS with a consolidated summary of your QREs. That means the wages, supplies, contract research, and computer rental costs associated with them.
Section G (or ‘Business Component Information’) is where you’ll include detailed reporting on each of your business components that contribute to QREs, through descriptions and associated expenses.
As well as the addition of these three new sections, other parts of the form have been reformatted. Sections A and B, for instance, have been streamlined to let you report your total QREs across all categories on a single line, while detailed breakdowns of these expenses have been moved to Section F.
Expanded reporting requirements
When using the new Form 6765, you’ll need to give more comprehensive disclosures to substantiate and R&D credit claims. For starters, you must now itemize qualifying research expenditures by category, depending on whether they fall under wages, supplies, contract research, and computer rentals. As mentioned above, this is done in Section F.
Similarly, Section G requires reporting of each business component’s name, description, and associated QREs, along with qualitative and quantitative details. This means explaining the nature and purpose of the R&D activities for each business component, and breaking out QREs per business component by category, respectively.
Also, if your business follows the ASC 730 Directive for the treatment of research and development (R&D) costs under US Generally Accepted Accounting Principles (GAAP), you can make a single entry in Section G, that summarizes your QREs related to your financial statement R&D costs.
Enhanced documentation standards
On the new form, you will also need to include supporting documentation for your claims. The IRS expects your business to maintain real-time records detailing the nature of research activities and the expenses incurred for them. At the same time, there’s an increased focus on establishing nexus, or demonstrating a direct connection between qualified research activities and their corresponding expenses. That way, you’ll ensure that only eligible costs are claimed.
What are the Compliance Implications of The Changes to Form 6765?
So why did the IRS make changes to Form 6765? In simple terms, it’s in line with the body’s attempts at heightened scrutiny. Recently, the IRS has undergone increased enforcement and audit activities related to R&D tax credit claims. The changes to the form basically mean that you need to provide more detailed information about your research activities and expenses. This will assist the IRS with its aims of improving tax administration and preventing fraudulent claims.
For this reason, mistakes in your form, or failing to fill it in correctly, could lead to a higher chance of audits and potential penalties.
As noted above, these changes are applicable to tax years beginning after 2024. But to facilitate a smooth transition, the IRS has made Section G optional for all filers for the 2024 tax year, giving you more time to adapt to the new requirements.
However, for the 2025 tax year, completion of Section G will become mandatory. But there are exceptions, including Qualified Small Businesses (QSB) who elect the reduced payroll tax credit, or businesses with QREs of $1.5 million or less and gross receipts of $50 million or less.
How to Adapt to the New Requirements
The changes to Form 6765 may mean extra work on your part, but with the right foundation, this shouldn’t pose a problem. To start with, you can update your internal review processes. And that includes proactive record keeping. To comply with the new requirements, you’ll need detailed tracking and effective expense allocation practices. That means ensuring that your accounting system can accurately capture expenses like wages, supplies, and contract research at the project or business component level. You’ll need comprehensive records that link each expense to specific research activities.
Inter-departmental collaboration is also essential. Make sure that your finance team works together with your R&D team and your legal department. That way, you can provide detailed descriptions of research activities and their objectives, and review contracts and agreements to confirm that research activities meet IRS criteria.
You can also use technology to your advantage. The automation features offered by accounting software help you streamline the documentation and reporting process. There’s also the option to integrate third-party platforms to simplify the claims process. Alternatively, you can reach out to a tax advisor for invaluable professional guidance.
What Does the New Form 6765 Mean for Your Business?
As with any IRS reporting requirements, some businesses are likely to be more affected by these changes than others. If your company has large or complex R&D activities, you must ensure that you are completely comfortable with the revisions.
Startups can also be affected. If you run a startup that makes use of the payroll tax offset under the R&D tax credit, you’ll also need to adapt to these changes.
Failure to comply opens your business up to risks and even penalties. Also, it could make the IRS denying you access to R&D credits, or delays in processing your claims. Together with the potential for audits, not complying won’t just cost you – it could also lead to reputational damage.
If You’re in Doubt, Reach Out
When it comes to tax compliance or navigating federal credits, you can’t afford to take chances and wing it. To ensure you’re on the right track, check in with tax experts who can offer you help, advice, and ensure that you get the most bang for your buck.
The Fusion CPA team can do just that – so if you’d like to talk about your taxes and make tax season easier than ever, why not schedule a Discovery Call?
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