R&D Reimagined: IRS Rolls Out Significant Updates to Form 6765

The form has undergone several structural changes, but our primary focus will be on the major additions.

The IRS released a revised draft of Form 6765 in December of 2024, and followed up with revised draft instructions in January 2025. The updated form requests an extremely high level of detail and documentation.  Taxpayers will need to be able to split QRE wages into categories and assign QREs to specific business components. Further guidance is expected, but the time to start preparing for the TY 2025 roll-out is now.

What’s Changing?

The form has undergone several structural changes, but our primary focus will be on the major additions.

New Mini-Section Above Section A

This new addition contains two questions pulled from the old Form and set in their own section:

• 280C Election?
• Member of Controlled Group or Business Under Common Control?

New Section E Asks Crucial Questions

This section poses several important questions, some of which are new to this iteration 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 (see below).
• Wondering exactly who is classified as an “officer”?
• Per the IRS, “The corporation determines who is an officer under the laws of the state where it is incorporated”

Did You Acquire or Dispose of Any Major Portion of a Trade or Business in the TY?

• Another new query, designed to flag any significant changes in trade/business activity.

Did You Include Any New Categories of Expenditures as Current Year QREs?

• This new question could be an attention-getter – taxpayers who answer affirmatively should be prepared for potential scrutiny
• At this point, taxpayers are advised to arrange any methodology changes NOW, before the new Form takes effect in TY 2025
• Wondering exactly how the IRS defines “Category of Expenditure?”
  • You’re not alone. Further clarification is expected.

New 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.”

• 80% = The business components that comprise at least 80% of total QREs
• Top 50 = 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.

(Have more than 50 business components?  Any extras can be reported in aggregate.)

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

• 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. That’s always been required, you’re probably thinking. 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)
  • Less than $5M in gross receipts for the current TY AND
  • Entity never had gross receipts in the 5 years prior to current TY
• Companies with:
  • Less than $50M in gross receipts AND
  • Less than $1.5M in QREs
• Companies complying with the ASC 730 Directive

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

Why the Changes?

The IRS continues to emphasize the importance of documentation in a successful claim, as demonstrated in recent case law.

The “substantially all” requirement is also part of the impetus for change.

• Under Sec. 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 wages can be taken for the 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?

Section G is not required for any taxpayers until TY 2025. However, it is likely that other Sections will need to be completed this year.

Now is the time to prepare, and compliance might entail significant changes for some clients.

Tax professionals should suggest clients 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

Want to Learn More?

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

For a deeper-dive, join us at an all-new Capstan University Webinar focused exclusively on the updated Form.

Mark your calendars for May 14 – or better yet, register now.