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Originally published in Practical Tax Strategies (May 2025), a Thomson Reuters journal

By Yair Holtzman and Sharlene Sylvia-Casimir

While the recent changes to IRS Form 6765, Credit for Increasing Research Activities, will alleviate some taxpayer burden, considerable additional time and effort will still be required to complete the form.

IRS Form 6765, Credit for Increasing Research Activities, is used by thousands of U.S.-based businesses every year to claim federal Research and Development (R&D) tax credits. Since an initial announcement of proposed changes to the form was made by the IRS on 9/15/2023, the tax community has been anxiously awaiting the final version and its implications for future filings. The IRS’s goal with the new form is to improve the review process by more easily flagging high risk claims, reducing fraudulent claims, and guiding taxpayers towards higher compliance through a better understanding of Section 41 documentation requirements. By releasing drafts of the new form on 6/21/2024 and 12/12/2024, the IRS has responded to provider and taxpayer concerns about how burdensome it will be to comply with the new requirements. On 12/20/2024, the IRS issued draft instructions for the new Form 6765 for the first time.

The most recently released revised form is a slightly simplified version of the initial proposal. The instructions provide some clarity and reduce some of the provider and taxpayer concerns, particularly related to completing new Section G, Business Component Information. However, taxpayers will still bear the additional burden of providing detailed information identifying business components included in the claim, which was not previously required at the time of filing.

Completion of Section G will be optional for all filers for tax year 2024 but will be mandatory for tax years beginning after 2024, with a couple of exceptions. The following taxpayers will be exempt from Section G:

• Qualified Small Business (QSB) taxpayers, as defined under Section 41(h)(1) & (2) who check the box to claim a reduced payroll tax credit.
• Taxpayers with total Qualified Research Expenses (QREs) equal to or less than $1.5 million, determined at the controlled group level, and while having equal to or less than $50 million of
  gross receipts, as determined under Section 448(c)(3) , claiming a research credit on an original filed return.

The new form also introduces Section E, Other Information, and Section F, Qualified Research Expenses Summary, which will be required for all taxpayers starting with the 2024 tax year.

What’s New with the Draft Form 6765

Initial Questions.

Prior to completing any detailed computational sections of Form 6765, taxpayers will now be required to answer two questions – whether they are (1) electing the reduced credit under Section 280C , and/or (2) a member of a controlled group or business under common control.

Previously, the election of the reduced credit under Section 280C could be found in each calculation section of the form (Section A for the Regular Credit or Section B for the Alternative Simplified Credit). Now that this election can be made without taxpayers being locked into a specific calculation method, companies filing protective elections have more flexibility to choose the best calculation method later.

However, many taxpayers are currently choosing to claim the credit not reduced by Section 280C, due to the larger benefit and perhaps more importantly due to new Section 174 capitalization requirements which became effective for 2022 tax years under the Tax Cuts and Jobs Act.

For purposes of calculating the R&D tax credit, members of a controlled group of corporations are treated as a single taxpayer. Companies meeting this definition are required to report the aggregate QREs and gross receipts, if applicable, for the entire group but claim only their portion of the group credit. The new form requires companies to specifically identify themselves as being a controlled group member and providing a separate attachment showing how their portion of the credit was computed. Based on the draft instructions, the information required to be included in the attachment for the controlled group are:

• Entity EIN.
• Entity Name.
• Common Parent/Designated Member.
• Consolidated Member.
• PBA Code.
• Wages QREs.
• Supplies QREs.
• Rent/Lease Computers QREs.
• Contract Research QREs.
• Total QREs of Controlled Member.
• Percentage of credit.
• Portion of credit.
• Total QREs of the Controlled Group.
• Total credit amount of the controlled group.

Sections A and B.

There are two substantive changes to Sections A and B – moving the election of Section 280C to the beginning of the form and moving the detailed breakdown of QREs to Section F, Qualified Research Expenses Summary. Sections A and B will now report the total QREs across all categories (wages, supplies, contract research, computer rental) on one line in Section A or B depending on the calculation method selected.

Sections C and D.

Sections C, Current Year Credit and D, Qualified Small Business Payroll Tax Election and Payroll Tax Credit, of the form remain consistent with prior year forms. Question 33b was added to Section D to indicate whether the election to apply the R&D credit against payroll taxes has been reported under a different EIN.

New Section E.

Section E is completely new. This section must be completed if there is an amount reported on line 48 in Section F of the form. Section E is used to report additional information related to QREs and includes the following line items:
Line 37 – Enter the number of business components generating the QREs on line 5 or line 20.

• In addition to the business components required to be identified in Section G, Section E will require including the number of business components that sum to total QREs on line 48.

Line 38 – Enter the amount of officers’ wages included on line 42.

• Per the draft instructions, the corporation determines who its officers are under the laws of the state of incorporation. The fact that an officer is also a shareholder does not change this reporting requirement.

Line 39 – Did you acquire or dispose of any major portion of a trade or business in the current tax year?

• The instructions reference the rules under Section 41(f) and the regulations thereunder.

Line 40 – Did you include any new categories of expenses as current year QREs?

•  “New categories of expenses” is not defined and may lead to some confusion. The instructions state that if you include any new categories or recharacterized any categories of expenses in the current year compared to the base year(s), those expenses must be included and adjusted in any of the base years when computing the credit. However, not all new categories of expenses will lead to a base period adjustment if this is the first time that type of expense was incurred by the business.

Line 41 – Did you determine any of the QREs on line 5 or line 20 by following the ASC 730 Directive?

• The IRS issued ASC 730 Directive for research credit claims to provide guidance for taxpayers that expense R&D costs on their financial statements. The directive provides guidance on how to determine the QREs. In essence, it allows large businesses to use financial statement R&D costs as evidence for R&D tax credits to streamline the process and reduce some of the burden on both taxpayers and the IRS.

Section F.

Section F is also new and is used to report the breakdown of current year QREs for each expense category (wages, supplies, contract research, and computer rental expenses), that were previously reported in each credit calculation under Sections A and B. Section F instructs taxpayers to first complete Section G, if applicable. Group members filing separate tax returns are instructed to only report their QREs, and not the combined group amount of QREs.

Section G.

Section G has evolved since the first release of the draft form. The IRS has reduced the amount of information requested of taxpayers from its original proposal. For example, taxpayers will now need to report 80% of total QREs in descending amount per business component, up to 50 business components. Business components more than the 80% / Top 50 must be reported in aggregate.

The updated draft form also eliminates the need to detail whether a business component is new or improved, or was bought, licensed, or leased. Finally, and perhaps most significantly, the IRS has limited the narrative requirement to describe the information sought to be discovered for each business component to refund claims on amended returns. Therefore, this information will not be required for timely filed original returns as had been feared by providers and taxpayers.

For each business component, the form requires:

• The EIN of the controlled group member conducting the research activities on the business component.
• The controlled group member’s principal business activity code.
• The name of the business component or the unique alphanumeric identifier.
• The business component type.
• The software type if the business component is software. The options to choose from are IUS – internal use software, DFS – dual function software, Non-IUS, and Excepted from IUS treatment.
• The amount of wage QREs for each category of qualified services – direct research, direct supervision, and direct support.
• The cost of supplies.
• The rental or lease cost of computers.
• The applicable amount of contract research expenses.

Conclusion

While the recent changes will alleviate some taxpayer burden, considerable additional time and effort will still be required to complete Form 6765. Planning will be necessary to both ensure proper documentation of each business component and to implement a methodology to properly capture costs. Companies that utilize detailed time tracking systems and/or use project-level accounting may have an easier time complying with the new requirements to the extent those processes are properly designed and implemented.

Companies that do not have such systems will need to figure out how to track the additional information required to comply. This could include adding the business component or project name in general ledger entries as a separate field or implementing monthly or quarterly surveys that create a project list and include employee time allocations by project as well as other project expenses. Tracking project goals, start and end dates, key project milestones, and successes and failures may also prove helpful.

We’ll be discussing this R&D topic and more during our upcoming webinar on June 11th—Register here!