How Form 6765 Can Benefit Your Business

How Form 6765 Can Benefit Your Business

Form 6765 is a document the Internal Revenue Service published as part of the tax code. The official name of the document is Credit for Increasing Research Activities. However, it is more informally called the R&D Tax Credit Form. It can be a valuable source of savings for your qualifying business.

What Is Form 6765?

Businesses use Form 6765 to claim the Research and Development tax credit, which gives startup companies certain tax benefits for carrying out research and development in the United States. For example, your business may claim this credit for dollars spent on software development. Using the RD credit form may reduce the amount your business pays in payroll taxes. For the tax year 2023, the savings may be as high as $500,000 due to the Inflation Reduction Act.

How To Fill Out Form 6765

You can find complete and detailed Form 6765 instructions on the IRS website. However, here are the steps in general terms.

  1. Review the criteria to determine whether your company is eligible for the R+D tax credit. Qualified companies showing permitted purpose have less than $5 million in gross receipts in the current year and, at most, five years of gross receipts.
  2. Determine which of your company’s research and development activities qualify according to the R&D four-part test.
  3. Complete either Section A or B, whichever applies to your company’s situation.
  4. Complete Section C using the outcome of Section A or B.
  5. Companies pursuing the payroll offset, which most will find advantageous, should complete Section D.
  6. Attach Form 6765 to your completed tax return when you submit it.
  7. File Form 8974.

The R&D form can be a valuable tool to help startup companies save on payroll taxes. However, you should carefully monitor your payroll taxes to ensure you get the full credit, as it is commonly missed in processing. Seek the help of a tax professional who understands your company’s situation to assess whether your company meets the R&D tax credit qualifications.

How Does Form 6765 Tie to R&D Tax Credits?

Form 6765 translates to R&D tax credits by allowing the company to apply a percentage of qualifying expenses against its federal income taxes on a dollar-for-dollar basis. Some of the activities that qualify for the credit are:

  • Hiring professionals such as engineers, designers, and scientists to carry out qualifying activities
  • Creating intellectual property, patents, processes, software, formulas, etc.
  • Improving existing products through qualifying activities
  • Developing innovative new products through manufacturing and development
  • Spending on supplies, salaries, research, and other expenses related to research and development

New companies can take advantage of these payroll tax deductions for up to five years to a maximum of $1.25 million toward quarterly federal payroll tax expenses.

How To File Form 6765

Form 6765 has four sections, A, B, C, and D. Each business completes either Section A or B and Section C. Whether Section D is necessary depends on the situation.

  • Section Adescribes the Regular Credit, which is 20% of the current year’s qualified research expenses above the base amount.
  • Section Boutlines the Alternative Simplified Credit, which may be simpler to calculate than the Regular Credit. The ASC equals 6% of the total qualified research expense during the first three years of taking the credit.
  • Section C, the Current Year Credit, uses the figure you calculated in either Section A or Section B to identify complexities in the tax company’s tax situation. Most businesses can ignore this section, but you should consult a tax professional.
  • Section Dapplies to the Qualified Small Business Payroll Tax Election and Payroll Tax Credit. A business should only complete this section if claiming the payroll tax deduction for its research expenses.

Corporate structures other than an S corporation or a partnership must also file Form 3800.

How To Process Form 6765

Submit Form 6765 with your usual tax return along with Form 3800 when it is required. Note that the forms must be filed by the deadline to claim the credit. Therefore, the credit for R and D expenses cannot be claimed on late or amended returns.

What Is the Interaction Between Section 174 and the R&D Tax Credit Under Section 41?

The IRS section 41 research credit is a permanent tax incentive for qualified research activities, which can be determined using the four-part test for R&D qualification:

  • Permitted Process: The research activity must tie to developing a new or improved business component for a permitted purpose (functionality, quality, performance, and reliability). The business does not have to improve the component to earn the credit.
  • Technological in Nature: The activities must fundamentally rely on hard sciences. For example, the activities should be in biology, computer science, physics, engineering, chemistry, geology, or a similar field. Soft sciences like marketing do not count.
  • Eliminate Uncertainty: At the outset, the taxpayer should be uncertain about the appropriate design, method, or capability to achieve the intended results. For example, the taxpayer should not know whether a product is feasible, the design is technically sound, or how to achieve the desired outcome.
  • Process of Experimentation: Businesses must experiment and evaluate alternatives through modeling, testing, simulating, and systematic trial and error.  

While both IRS section 174 and section 41 deal with incentives to encourage research and development, section 174 covers a broader range of expenses. However, the costs claimed under section 41 must also meet section 174 requirements. Additionally, section 41 qualified research does not include activities that involve:

  • Surveys, advertising, or market research
  • Duplication or adaptation of an existing business component
  • Research conducted outside of the U.S.
  • Research in the arts, humanities, or soft sciences
  • Funded research from a grant, government, or other outside entities

The changes listed in The Tax Cuts and Jobs Act of 2017 (TJCA) did not have a material impact on the Section 41 credit. However, the proposed American Innovation and Jobs Act would expand this section regarding qualified small businesses. As section 41(h) noted, qualified small businesses can use the R&D credit to offset payroll tax. Some suggested amendments include:

  • Doubling the cap from $250,000 to $500,000.
  • Allowing startups to claim the refundable credit for up to eight years instead of five.
  • Expanding the startup credit rate to 20%.
  • Increasing the gross receipts threshold to $15M.

The R&D tax credit isn’t just for scientists. It covers a broad range of activities, from concept development to commercial release. You may qualify if your company is working on new products, processes, software, feasibility testing, engineering, prototypes, testing, design, documentation, or research. Wages, supplies, and contract research expenses are eligible.

The research and development tax credit form can be a valuable tool that results in significant savings for companies. However, the forms and documentation can be complicated, so you should seek the services of a professional. Contact us at KBKG to maximize this valuable research and development tax treatment.