Are You Ready for the IRS Changes to Form 6765 on R&D Credits

Ever felt like the IRS was breathing down your neck? Well, if your business has been claiming R&D tax credits, get ready for some extra scrutiny. The IRS has decided it’s time to crank up the oversight on who’s cashing in on these credits. Form 6765 (Credit for Increasing Research Activities) just got a major facelift, and businesses can no longer fly under the radar with vague claims. The IRS says it’s all about transparency and preventing fraud, but for tax professionals, CFOs, and business owners, it means more paperwork, stricter compliance, and a higher chance of audits. So, should you panic? Not exactly. But you should start prepping now if you want to avoid a tax season nightmare. 

The IRS Just Raised the Bar

Gone are the days of high-level estimates and broad classifications. One of the biggest shake-ups is the new Section G, the IRS’s latest way of saying, “Show me the receipts.” Before, businesses could lump all R&D expenses together, but now they must break them down by project—including wages, supply costs, and contract research expenses. Think of it like a food truck festival: instead of listing “food expenses,” now you’ve got to detail how much went to tacos, burgers, and that overpriced artisanal lemonade.

Key IRS Justifications for the Change:

• Reduce fraudulent claims by demanding specific project-level details.
• Improve reporting consistency across businesses and industries.
• Strengthen IRS audit capabilities by making vague claims harder to justify.

This shift signals an increased likelihood of audits for companies that fail to comply. Businesses must upgrade recordkeeping processes to ensure compliance and avoid disallowed claims.

New Form 6765 Changes

If you’re in charge of tax filings, here’s what’s new:

• Detailed Expense Breakdown: Companies must now categorize wages, supplies, and contract research expenses by individual R&D projects, rather than lumping them together.
• Officer Wages Under Scrutiny: The IRS now wants to see officer wages included in the credit. Translation: If the CEO claims R&D wages but hasn’t touched a lab in years, expect some questions.
• Stricter Documentation Expectations: The old “file now, figure it out later” approach? Not gonna fly anymore. The IRS expects supporting records at the time of filing, not when they come knocking
• ASC 730 Directive Compliance: Large corporations using ASC 730 (Accounting Standards Codification for R&D) must indicate if they’re applying this methodology for their QREs.
• E-Filing Complexity for Large Companies: If a company has more than 15 business components, additional sheets must be attached when filing non-electronically.

For tax professionals, this marks a major shift from year-end adjustments to real-time compliance throughout the year. The traditional “file now, prove later” approach is no longer an option.

More Work, but Maybe More Credit Too

Before you start stress-eating over these changes, let’s talk silver linings. Yes, there’s more work involved but there’s also a chance to maximize your R&D credit.

• Better Audit Preparedness: Detailed documentation lowers the risk of IRS disputes and penalties.
• Stronger Justification for Credits: The new structure ensures only legitimate R&D activities qualify.
• Potential for Larger Credits: A more granular breakdown may reveal additional qualifying expenses that were previously overlooked.

By integrating tax planning into R&D operations, businesses can maximize credits and avoid compliance pitfalls. A transition period is given, and businesses are encouraged but not required, to complete Section G. However, full compliance will be mandatory for the 2025 tax year (filed in 2026). Companies that fail to meet the new standards may face delays, audits, or credit disallowances.

Industries That Need to Pay Extra Attention

Some industries are about to feel these changes more than others. Here’s who needs to be extra careful:

• Technology & Software Firms: Must now allocate expenses to each software product or feature, instead of grouping all software R&D costs.
• Manufacturing & Engineering: Businesses developing new materials or improving processes must distinguish R&D efforts by each product enhancement.
• Biotech & Pharmaceuticals: Clinical trials must track research expenses separately by trial phase.
• Small Businesses & Startups: Companies with QREs below $1.5M or using the payroll tax credit election are exempt from Section G but must still maintain clear documentation.

Don’t Get Caught Slipping

Expect stricter IRS enforcement and more targeted audits. Here’s what will get you flagged:

• Missing or vague business component reporting (Failure to properly itemize expenses under Section G).
• Unsubstantiated officer wages (Claiming high executive salaries without proof of direct R&D involvement).
• Inconsistent reporting year-over-year (Significant credit fluctuations without clear justification).
• Failure to update recordkeeping systems (Businesses unable to provide supporting documentation at the time of filing).

The safest approach? Prepare as if an IRS inquiry is inevitable. Companies implementing strong tracking and reporting systems now will be in a far better position if audited.

Action Plan for Tax Professionals

With these sweeping changes, tax professionals should act now to ensure clients are prepared. Here’s what to do:

• Review Client Recordkeeping Practices: Ensure that R&D expenditures are categorized properly in alignment with Section G.
• Advise on Tech and Compliance Solutions: Businesses using manual tracking methods may struggle with the new standards—recommend appropriate software.
• Enhance Advisory Services: Help clients identify potential documentation gaps and develop strategies to ensure compliance.
• Educate Clients and Teams: Train finance and R&D personnel to track expenses accurately and maintain records in real time.

The IRS is done with vague claims. If you’re not stepping up your compliance, you’re risking delays, audits, and maybe even losing your credit altogether.

The Bottom Line

The days of generalized R&D credit claims are over. Businesses must be proactive, tighten their compliance, and track R&D spending like never before. The good news? There’s still time to adjust and get ahead of the curve. Start preparing now, educate your teams, and upgrade your tracking systems. The 2025 tax season is going to separate the prepared from the panicked—make sure you’re in the first group. Stay ahead of the curve! Subscribe now for the latest tax trends, financial insights, and regulatory updates—delivered straight to your inbox!