IRS Form 6765 Updates: What The R&D Tax Credit Changes Mean For Your Business

‍Introduction

The IRS has introduced new changes to Form 6765, the form businesses use to claim the Research & Development (R&D) tax credit. These updates, starting for tax years beginning in 2024, require businesses to provide more detailed reporting on their R&D activities.

With these changes, businesses will need to track expenses more precisely, document their research activities thoroughly, and ensure compliance with IRS standards. Let’s break down what’s new and how your company can prepare.

What is Form 6765 and Why Does it Matter?

Form 6765 is how businesses claim the federal R&D tax credit, which helps companies recover costs associated with innovation. This credit can offset qualified research expenses (QREs) like employee wages, contract research, and supply costs.

Historically, the form has been relatively straightforward, but the IRS is tightening compliance with new reporting requirements. These changes aim to increase transparency and prevent fraudulent claims, but they also place a greater burden on businesses.

What’s Changing?

The updated Form 6765 introduces three major new sections: Section E, Section F, and Section G. Each section demands additional details on R&D activities and expenditures. Here’s what’s new:

Section E: General Business Information

Taxpayers must now answer five additional questions:

• The number of business components generating R&D expenses.
• The amount of officers' wages included in total qualified wages.
• Whether the company acquired or sold a portion of the business.
• Any new types of R&D expenses included this year.
• If the business followed ASC 730 (Accounting Standards Codification) for calculating QREs. ASC 730, issued by the Financial Accounting Standards Board (FASB), outlines the accounting treatment for Research and Development (R&D) costs under U.S. Generally Accepted Accounting Principles (GAAP). It establishes guidelines on how businesses should account

Section F: Detailed Breakdown of QREs

Businesses must now categorize qualified research expenses (QREs) into distinct areas:

• Wages
• Supplies
• Contract Research
• Rental or Lease of Computers
• Basic Research Costs

Additionally, businesses must indicate whether they need to complete Section G.

Section G: Detailed Reporting of Business Components

Section G is required* for businesses with:

• More than $1.5 million in QREs at the controlled group level.
• More than $50 million in gross receipts on an original tax return.

If required to complete Section G, businesses must:

• Provide a breakdown of at least 80% of total QREs by business component.
• Identify each business component, such as products, processes, or software.
• Classify software-related components as Internal Use Software (IUS), Non-IUS, Dual Function, or exceptions.
• Further detail direct research wages, direct supervision wages, and direct support wages for each component.

*For tax years started in 2024, this section is optional due to it being a transition period. Starting with tax years beginning in 2025 this section will be required for all returns that meet the above requirements.

How These Changes Affect Businesses

The IRS is increasing scrutiny, and businesses must be prepared to justify their claims with detailed documentation. Here’s what these changes mean for you:

1. Greater Emphasis on Record-Keeping

Businesses must maintain real-time records of R&D activities, tracking which projects qualify and how expenses are allocated.

2. Increased Time & Effort for Tax Credit Claims

The new IRS requirements demand a more detailed breakdown, which means more work for finance and accounting teams.

3. Higher Risk of IRS Audits

With more detailed reporting, the IRS will have more data points to scrutinize claims, making compliance more important than ever.

What Businesses Should Do Now

To stay compliant with the new IRS requirements, businesses should take the following steps before tax season:

• Implement a robust tracking system – Keep detailed records of all R&D expenses in real time. 
• Prepare detailed reports for business components – Clearly identify and document each R&D activity and associated costs. 
• Engage with tax professionals – The IRS is cracking down on improper claims, so expert guidance is key. 
• Plan ahead for Section G requirements – If your company exceeds the reporting threshold, ensure you are ready for the detailed breakdown required. 
• Consider using automation tools – R&D tax credit software can help streamline compliance and reporting.

The IRS is making big changes to Form 6765, requiring businesses to provide more transparency and detailed reporting for R&D tax credits. While these changes increase compliance burdens, proactive planning can help businesses stay ahead and continue benefiting from the credit.

If your company relies on the R&D tax credit, now is the time to review documentation practices, adjust your tracking methods, and consult with tax professionals to ensure compliance.

Need help? TaxTaker is here to support you. Book a call with our team today to ensure your R&D tax credit claims are accurate and optimized for your business!