By Gina Maurino

The IRS released a revised draft of Form 6765 in December 2024 and followed up with its revised draft instructions in January 2025. Taxpayers use Form 6765 to claim a credit for increasing research activities, to elect the reduced credit under Section 280C, or to elect and figure the payroll tax credit. The updated form now requests an extremely high level of detail and documentation. Taxpayers will need to be able to split qualified research expense (QRE) wages into categories and assign QREs to specific business components. Further guidance from the IRS is expected, but now is the time to start preparing for the tax year 2025 rollout.

Form 6765 has undergone several structural changes. But in this blog I’ll primarily focus on the major additions.

Mini-Section above Section A

This new addition contains two questions pulled from the old form, but they are set in their own section:

• Are you electing the reduced credit under Section 280C?
• Are you a member of a controlled group or business under common control?

These questions highlight special circumstances that may involve unique analyses, reporting, and legislation. This new minisection flags these circumstances in a more streamlined manner for easy identification by the IRS.

Section E Asks Crucial Questions

This section poses several important questions, some of which are new to this updated version of the form.

Officers’ Wages – This new question supports a major new focus: wage tracking by employee type (see Section G). Additional documentation will be needed to fully answer this new question. But maybe you’re wondering exactly who is classified as an “officer”? Well, per the IRS, “The corporation determines who is an officer under the laws of the state where it is incorporated.”

Acquire or Dispose of Any Major Portion of a Trade or Business in the Tax Year – This new query is designed to flag any significant changes in trade/business activity.

Inclusion of Any New Categories of Expenditures as Current Year QREs – This new question should be an attention-getter. Any taxpayers who answer affirmatively should be prepared for potential scrutiny. At this point, taxpayers may want to arrange any methodology changes now, before the new form takes effect in tax year 2025. If you’re wondering how the IRS defines “Category of Expenditure,” you’re not alone. Further clarification is expected.

Section G May Mandate Procedural Changes

Section G is a game-changer. The level of granular detail requested will likely require a more robust study process and expanded information-gathering activity. But let’s start at the beginning.

Section G Focuses on the “80%/Top 50” – The first step in successfully completing Section G is understanding the “80%/Top 50.” The 80% reference is to business components that comprise at least 80% of total QREs. Top 50 means the top 50 business components.

When it comes to business components, taxpayers must now provide either the 80% or the top 50. Business components must be listed in descending order by QRE amount. If you have more than 50 business components, extras can be reported in aggregate.

Once the 80%/Top 50 have been determined, the following information needs to be provided for each one:

• Employer identification number (EIN) of the controlled group member conducting the research.
• Principal business activity (PBA) code of the controlled group member conducting the research.
• Business component’s name or unique alphanumeric identifier (should be consistent with nomenclature used in internal records).
• Business component type (product, process, other).
• Software designation (if applicable).
• Information sought to be discovered (49(f)). This will require a unique description of each business component. Future guidance is anticipated, as the desired response format has not been specified.

And that’s not all.

For each business component, QREs must be provided. You’re probably thinking, “That’s always been required. What’s the big deal?” The big deal is that while supply costs, cloud hosting costs, and contractor fees can be reported as a simple line item as before, wages must be broken down into three categories:

• Wages paid to those performing research.
• Wages paid to those directly supervising research.
• Wages paid to those directly supporting research.

Collecting this data is a tremendous endeavor and will require a clear understanding of the definitions of “direct supervision” and “direct support.”

Does Everyone Have to Complete Section G? – There are a few fortunate filers who will be exempt from the reporting burden:

• Qualified Small Businesses (for Payroll Tax Credit) with less than $5 million in gross receipts for the current tax year and the entity never had gross receipts in the five years prior to the current tax year.
• Companies with less than $50 million in gross receipts and less than $1.5 million in QREs.
• Companies complying with the ASC 730 directive.

If your client doesn’t fall into one of the above categories, they will be required to complete Section G.

Why the Changes?

The IRS continues to emphasize the importance of documentation for a successful claim, as demonstrated in recent case law. The “substantially all” requirement is also part of the impetus for change.

Under Section 41(d)(1), “substantially all” of the research activities must constitute elements of a process of experimentation that relates to a qualified purpose. If 80% or more of the research activity passes the test, then the substantially all requirement is met. This means that even if an employee only spent 80% of his time engaged in qualified activity, 100% of his or her wages can be taken for the R&D credit. This can become particularly tricky when considering employees who are in support or supervisory roles. As such, the IRS is requesting the granular detail required in Section G.

What Do Taxpayers Need to Know?

Now is the time to prepare because compliance might entail significant changes for some clients. Tax professionals should suggest to clients that they consider the following (as appropriate):

• Assess current information-gathering procedures.
• Implement time tracking, not just by project but by specific activity and employee type (researcher, supporter, supervisor).
• Establish or expand contemporaneous documentation practices.
• Start the R&D study process earlier than usual. It might take longer than in the past.

There’s a lot to take in, and we’re just scratching the surface!

Gina Maurino is a business development manager at Capstan Tax Strategies. She works closely with taxpayers and accounting firms to provide practical, creative, and customized engineering-based tax solutions. Maurino can be reached at gmaurino@capstantax.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}