IRS Form 6765 Instructions: How to Fill it Out in 2023
If you run an eligible small business or medium-sized company in the technology field, you can opt for the R&D Tax Credit by filling out form 6765.
The R&D Tax Credit is a type of tax return credit available for businesses that have costs regarding research and development. This credit for increasing research activities provides an incentive to keep innovating.
Regardless of the type of company you manage, seasoned or startup, you can benefit from this tax credit as long as your business meets the eligibility requirements established by the Internal Revenue Code, Section 41.
Filling out the form 6765 might not be so simple, though. Let me walk you through the process so you can get familiar with it.
Also, I’ll explain to you what the R&D Tax Credit carryforward is and how you can benefit from it.
Let’s dive right in.
What is Form 6765?
Form 675 refers to the R&D Tax Credit, a specific amount that some companies can subtract from the total taxable income when paying taxes.
This tax law has been an option for companies since 1981. You can find it in the Internal Revenue Code, Section 41, and it is intended for companies that have research and development expenses.
An example of companies that can opt for the R&D tax credit is software companies that need to invest in technology and have high research expenses, particularly with engineering payroll. This is why Form 6765 is often referred to as a payroll tax credit.
The R&D tax credit allows companies that conduct research to come up with innovative solutions to common industry problems. As a result, customers can have improved products.
One of the main reasons R&D tax credit continues to be relatively unknown to some businesses is that it didn’t use to be a solid long term budgeting plan.
This was mainly because the Tax Credit was not reliable enough since it had to be renewed by the Congress periodically.
However, this changed in 2015 after the tax reform that made the R&D Tax Credit permanent under the Protecting American from Tax Hikes (PATH).
Thanks to this tax reform, medium and small companies that conduct research in the United States can devise income tax return plans that include the R&D Tax Credit as a viable option.
In order to apply for the R&D credit, companies must fill out form 6765.
However, understanding and filling out this research credit form can be somehow complicated. For this reason, you can choose to work with a company that will make this process a lot easier for you.
One of the best companies to recover your R&D costs from the government is Boast Capital, an organization that has been helping companies get their tax credit since 2011. They help you know whether you run a qualified small business or enterprise company. They work with many of the worlds biggest engineering teams to help alleviated their qualified research expenses. I used them to help lower the costs of my engineering when building out my maintenance training platform, Maintenance Manager HQ.
IRS Form 6765: Everything You Need to Know
Before diving into form 6765, you need to check if your business meets the eligibility requirements established by the Internal Revenue Code.
Let’s take a look:
R&D Tax Credit Eligibility Requirements
You can only be eligible for the Tax Credit if your company conducts research as defined by the Internal Revenue Service of the United States of America.
Therefore, you can only apply if the nature of your company’s research is the following:
1. Research for Which Expenses May Be Treated as Section 174 Expenses
This means that the research must be done in order to discover information that is technological. Also, that you intend to apply this technology for developing a new or improved business component of the taxpayer.
2. Research Must Be Elements of a Process of Experimentation
This process of experimentation must relate to a new improved function, performance, reliability, or quality. Also, you must apply all the research activities separately with respect to each business component of the taxpayer.
Be aware that the Internal Revenue Service WILL NOT admit the following type of research:
- If it’s conducted after the beginning of commercial production.
- If it’s adapting an existing product or process to a particular customer’s need.
- Duplication of an existing product or process.
- Surveys or studies.
- Relating to certain internal-use computer software.
- If it’s conducted outside the United States, Puerto Rico, or a U.S. possession.
- Research in the social sciences, arts, or humanities.
- Research funded by another person (or governmental entity).
If your business meets the qualified research standards, it will also need to be in accordance with the following criteria:
1. Your business can’t be a tax-exempt organization defined by the law regulations in section 501.
2. The gross receipts or revenue must be less than $5 million for the tax year.
3. Gross receipts can’t surpass the end of the five-year tax period.
How to Fill Out Form 6765
Form 6765 is composed of four basic sections (A, B, C, D) that you need to fill out according to the nature of your business to understand your total qualified research expenses.
You can claim the regular credit in section A or you can choose the alternative simplified credit (ASC) in Section B.
The IRS recommends you make your calculations using both methods and then fill out the one that allows you the most credit.
Bear in mind that if you decide to apply for the alternative simplified credit (ASC), it will apply to the current year and all years after. This choice cannot be changed later.
Section A
You must fill out this section if you meet all the eligibility requirements and wish to claim the regular R&D tax credit.
This section consists of 8 lines that you need to fill in carefully with the information required. (Lines 1,2,3,7,8,10,11,17)
This credit is the 20% of the taxpayer’s current year QREs that extend beyond a calculated base sum.
Though filling out form 6765 can be complex, you can do it following the instructions provided by the IRS on their official website.
Section B
The Alternative Simplified Credit (ASC) allows you to calculate available R&D tax credits in an alternative way.
The ASC can be more flexible with many businesses, allowing them to claim the credit even when their current year expenses are not enough to meet the regular credit calculation limit.
Unlike the regular credit’s 20% rate, the ASC rate is 14% of the total of QREs that surpass 50% of the average QREs for the previous three tax years.
You can complete this section and attach the completed form 6765 to your timely filed (including extensions) original return for the tax year the election applies.
Section C
Once you’ve calculated your business’ current year tax credit, you can fill out section C of form 6765 to identify additional forms and schedules that warrant reporting based on your business structure.
Even though for many taxpayers section C can be ignored, it is important to consult with an R&D tax credit professional to determine if you need to fill this section out.
Section D
You only need to complete this section if you are making the payroll tax election for your small business.
Is Filling Out Form 6765 Worth it?
If you meet the eligibility requirements established by the IRS, filling out form 6765 can help you save money at the end of the tax year.
Qualified research doesn’t have to be as expensive as it currently is for your business. The best course of action is to hire a company that can help you out with this, such as Boast Capital.
This way, you can include R&D tax credit in your budgeting plan and keep improving the quality of your technology.
Good Luck!
