The IRS has turned up the spotlight on the research credit by revising Form 6765 in ways that demand more detailed documentation and clearer reporting. While many of the new requirements will be optional for the 2024 tax year, they become mandatory in 2025. Businesses that wait until the last minute may have to scramble to collect the necessary details about their research activities. Being proactive will likely save time, avoid headaches, and help ensure you maximize the credit you’ve earned for driving innovation.
Why the Research Credit Matters More Than Ever
The research credit, introduced in 1981, was designed to encourage businesses to innovate by offering tax incentives for qualifying research expenses. Until now, filings on Form 6765 required only numerical reporting into four categories—wages, supplies, contract research payments, and computer rental (hosting) costs (collectively known as “qualified research expenses” or “QREs”). While the credit has often been a valuable offset for companies developing new or improving existing products and solutions, the IRS now seeks more transparency in how businesses calculate and claim these expenses.
When These New Rules Kick In
The IRS is rolling out the new reporting requirements gradually. For the 2024 tax year (returns filed in 2025), many additions will be optional. By the 2025 tax year (returns filed in 2026), Section G (the most lengthy and detailed) becomes mandatory for most filers. Section G remains optional for businesses with total qualified research expenditures of $1.5 million or less and gross receipts of $50 million or less—or small businesses claiming a payroll tax offset.
Business Component Details & What’s Changing on Form 6765
The revised form emphasizes more thorough disclosure for each “business component,” which is defined as any product, process, software, technique, formula or invention that a business is developing or improving. Often taxpayers think of a business component as a stand-alone product, SKU, or software that can be marketed to customers (e.g., a license for the entire software application); however, a software business component could also be subdivided into smaller subcomponents (e.g., the latest software module or feature). The changes for the form revolve around three new sections (E, F & G) that are particularly notable:
What to Know About Section E
Section E includes questions beyond a tally of expenses. You’ll need to report the number of business components with qualified research expenses, officer wage QREs, and any significant business changes—such as acquisitions or disposals. It also asks whether new categories of expenditures appeared since the prior filing and whether the ASC 730 Directive was used in expense calculations.
Where Your Expense Summary Now Lives
Section F summarizes your QREs which feed into Sections A or B for credit calculation. Think of it as the central repository for your data inputs.
The Big One: Breaking Down Section G
Section G is the most significant update. Businesses must now detail up to 50 business components covering at least 80% of total QREs. For each, the form requests specifics about the project, whether it involves software, the kind of software effort, the knowledge sought, and the breakdown of QREs by business component. This section becomes mandatory in 2025 for most filers, unless they qualify under small business or expenditure thresholds.
What This Means for Your Credit Claims
With more required data points, businesses must prepare for a greater level of recordkeeping rigor. While it means more upfront work, the benefit should result in a clearer, more defensible credit claim. Collecting information at a granular level helps companies understand how research spending is distributed across products, processes, or technologies.
“The revised form can actually help companies showcase the extent of their innovational pursuits,” says Matt Neuenswander, R&D Senior Manager at Tanner. “Once you get used to capturing these details, you might uncover overlooked expenses that bolster your credit.”
How to Get Ready Now:
Start with Better Tracking
Implement systems that allow project-specific cost tracking. Software that breaks down labor costs per business component helps classify expenses in real-time rather than retroactively.
Rethink How You Organize Your R&D
Reassess how you define and report business components. If a product spawns several versions, each may need to be separately listed if changes are substantial.
Focus on the Details That Matter
Focus on business components representing the majority of QREs. Track metrics like direct research hours worked, and research supervision and support activities (lab support, modeling, and prototypes and testing) tied to each business component to align with Section G’s format.
Don’t Wait Until the End of the Year
Quarterly or semi-annual reviews help confirm correct categorization and identify missing records. Mock filings with partial data can streamline the final process and reduce surprises.
Why Real-Time Prep Beats the Year-End Scramble
Gathering these details at year-end can be overwhelming and risk-prone. Misclassified expenses or missed documentation become more likely. Businesses that track in real time or more frequently than annually typically enjoy stronger support for claims in the event of an audit.
How Tanner Can Help You Stay Ahead
Tanner’s tax services are built to help you stay ahead of regulatory change. We bring deep experience with research credit law and reporting updates, focusing on three key areas:
- Strategic Tax Planning: We align operations with tax benefits, guiding you toward the most efficient compliance options without limiting innovation.
- Research Credit Consultation: We simplify new IRS rules, help define components, and structure your documentation to maximize your credit. We’ll help you evaluate whether Section G applies to you and how to meet it efficiently.
- International, State, and Local Tax Coordination: If your research spans jurisdictions, we ensure compliance across borders. Our team also integrates smoothly with your accounting platforms like QuickBooks, Microsoft Dynamics, or NetSuite.
What Now?
While the new Form 6765 requirements may seem complex, the optional reporting period in 2024 offers a runway to adjust. Treat these changes as an opportunity to improve your processes—not just a compliance burden. With better documentation and proactive tracking, you can potentially increase your credit and strengthen the connection between your innovation and tax strategy. Reach out to Tanner’s R&D tax credit team for help planning your next move. We’re ready to help you make the most of what’s coming.