Research and development — R&D — tax credits offer companies a dollar-for-dollar reduction in their federal tax income liability. But how do you claim them?
With Form 6765.
You can find instructions to fill out and file Form 6765 on the IRS’s website. However, the instructions often reference the complex Internal Revenue Code — if you’re not familiar with the technicalities of the tax code, it can be challenging and time-consuming to follow the IRS guide.
So, we developed this guide to help you maximize your return and fill out Form 6765 accurately, efficiently, and quickly. We’ll help you claim your R&D tax credit without all of the technical jargon.
Related: Calculate Your Tax Liability
Table of Contents
Form 6765: What It Is & Why You Need It
Form 6765 is the primary form used to calculate and claim R&D tax credits. Many companies are entitled to this credit for their experimentation and research activities. This form also allows companies to communicate the way they would like to apply for those credits.
For example, if you run an eligible small business, you can use the R&D tax credit to help offset both your regular tax liability and your alternative minimum tax liability. Qualified small businesses can also choose to apply for the R&D tax credit against their payroll taxes. On the other hand, if you’re part of a group of companies, you can use Form 6765 to report and substantiate your company’s portion of the entire group’s R&D credits.
When looking at Form 6765, you’ll see four distinct sections: A, B, C, and D. In this guide, we’ll dive into those four sections and explain what you’ll need and how to complete them.
Determining Your Tax Credits: Filling Out Form 6765 Sections A & B
A lot of confusion occurs when companies try to determine which method to use to calculate their R&D tax credits. Your two options are using the regular method — which means you’ll fill out section A — or using the alternative simplified credit method — which means you’ll fill out section B.
Note: you will only fill out one of these two sections of Form 6765 — you will never need to complete both sections A and B.
To help decide which is the best approach for your company, you’ll want to determine your entitlement under both methods, choosing whichever one is more advantageous.
In terms of how these two approaches differ, the regular R&D credit consists of 20% of all your company’s qualifying expenditures exceeding a specified base amount for the current year.
However, working out that base amount can be challenging — it often involves detailed calculations, and the level of detail depends on whether your business is well established or relatively new.
On the other hand, the alternative method starts with identifying the difference between two calculations:
- The amount of your company’s qualifying expenditures over the current year
- 50% of your company’s average qualifying expenditures for the previous three tax years
Then, you will multiply that difference by 14%, and the result is your R&D credit under the alternative method.
Related: Easily Calculate Your R&D Tax Credit
Form 6765: Identifying Eligible Research Expenses
No matter if you’re filling out section A or section B, you’ll need to establish what expenses related to your company’s eligible R&D activities. Activities that qualify must meet the IRS’s requirements set in their four-part test.
On Form 6765, there are three different expenses you can claim — salaries, supplies, and contracted research. To claim any of these expenses, you’ll need to support your claims with accurate, detailed documentation.
For most companies, the best starting point would be to identify any potential qualified research activities and their related expenses that make up the R&D costs of your company’s financial accounting system. However, it is only a starting point — you’ll need to perform much more work to accurately complete Form 6765 and claim your maximum R&D tax credit.
Why You Might Want to Take a Reduced Credit on Form 6765
In both section A and section B of Form 6765, you’ll find an option to take a reduced credit at the end.
Why would you want to take a reduced credit? Well, taking a reduced credit does reduce the amount that you’ll receive for your R&D expenses, but it also eliminates your company’s need to make unfavorable adjustments to its taxable income. The election to take a reduced credit can also simplify your company’s preparation of its state tax return.
There are also other reasons why companies choose to make the selection. With all other factors being equal, corporations that are subject to the highest corporate tax rates will pay the same amount whether or not they choose to make this election.
Current Year Credit & Payroll Tax Offset: Form 6765 Sections C & D
Once you quantify your company’s R&D tax credit for the current year, you’ll move on to section C of Form 6765. This section will direct you to other schedules and forms that you will need to fill out and report different things, depending on your business structure.
The last section — section D — of Form 6765 lets qualified small businesses to use either all or a portion of their R&D tax credits to offset the businesses’ payroll tax obligations. This offset has a maximum of $250,000.
The amount that you choose in this section will also carryover when you fill out and file Form 6765 — which is the form to file for a payroll tax credit due to increasing business research activities. That offset will become available to your business quarterly following the filing of your federal tax return.
File Form 6765 the East Way: With Parachor Consulting
Your company needs to file Form 6765 with its income tax return by the tax due date deadline.
R&D tax credits and Form 6765 are not the easiest to navigate. However, to ensure that your company gets to take full advantage of its tax savings opportunities, we’re here to help at Parachor Consulting.
Get in touch with our business tax experts — start maximizing your R&D tax credits with our consultants today!