IRS Form 6765 – Newly Released Draft Instructions

< Back to insights IRS has released the long-awaited draft instructions for Form 6765, Credit for Increasing Research Activities. So, how will this impact taxpayers and tax preparers? The draft instructions provide clarity on qualifying research expenses (“QREs”) and excluded activities, as well as how to complete the form to claim the research credit under IRC Section 41. Furthermore, the new instructions shed light on businesses under common control/controlled groups, Section 280C election, the definition of qualified research with respect to software development and qualifying factors for internal use software (“IUS”) and dual function software (“DFS”), among other things.

Key Changes in IRS Form 6765 Draft Instructions

See below for a breakdown of major new updates, each new form section, and its impact:

• Controlled Group/Common Control: Taxpayers will now note at the top of the form on Item B whether they qualify as a member of a controlled group. Qualifying controlled group members must now also provide additional information in an attachment to the return. Newly required information for controlled groups includes the controlled group’s principal business activity (“PBA”) code.
• Section 280C Election: Taxpayers will now make the reduced credit election under Section 280C at the top of form 6765. Companies forgoing the 280C election with a credit amount that exceeds the allowable deduction amount will still reduce the amount of capitalized expenses by the amount of the excess but are now required to include an attachment identifying the specific capitalized expenses. The 280C election is still irrevocable once filed and unavailable for amended returns. However, electing 280C on an original return as a protective measure does not lock a taxpayer into either the Regular Credit method or the Alternative Simplified Credit (“ASC”) method.
• Research With Respect to Software:
  • The IRS has provided further detail regarding what should be constituted as IUS. Namely, IUS is software developed for the taxpayer’s use in general and administrative functions that facilitate and support the taxpayer’s conduct of their trade or business. These general and administrative functions include the following: financial management, human resources management, and support services functions.
  • The IRS has also provided further detail regarding what should be constituted as DFS. DFS is defined as a software developed for the taxpayer’s use in general and administrative functions that facilitate and support the taxpayer’s conduct of their trade or business, as well as enable a taxpayer to interact with third parties or provide the ability for third parties to initiate functions or review data on the taxpayer’s system.
  • Naming Conventions for Attachments: The IRS has now provided a standard naming convention for e-filers that must be used by the taxpayer for filing attachments, if applicable.

New IRS Form 6765 Sections:

• Section E – Other information: Taxpayers will now provideadditional details, including the number of business components generating QREs and the total amount of officers’ wages included in the credit calculation.
• Section F – Qualified Research Expenses Summary: Taxpayers will now indicate whether they are required to complete Section G, as well as aggregate total QRE amounts for each category.
• Section G – Business Component Information:
  • Taxpayers will now provide information for at least 80% of their overall QREs by business component but no more than 50 business components.
  • Section G is optional for Qualified Small Business (“QSB”) taxpayers, as well as taxpayers that have total QREs equal to or less than $1.5 million and gross receipts equal to or less than $50 million during the tax year, determined at the controlled group level.
  • Section G will be optional for all filers for tax years beginning before 2025.

How Bennett Thrasher Can Help

Navigating the R&D tax credit can be complex, so it’s best to consult a tax professional. Bennett Thrasher has a team of specialists that can assist.  If you are in need of assistance, please contact Nina Desai at [email protected] or Julie Hagan at [email protected]. Back to insights