The IRS rolled out the new Form 6765 and instructions for the 2024-25 tax year on February 10, 2025, presenting major structural changes that taxpayers claiming the Section 41 Research & Development (R&D) Tax Credit should understand and plan for. These modifications impose major extra reporting requirements even though they seek to improve openness and standardization in the reporting of Qualified Research Expenses (QREs) and Business Components.
In this article, we break down the latest updates to Form 6765 and explore what they mean for companies and those involved in R&D tax credit consulting.
What’s New in the 2024-25 Form 6765?
1. New Section E – “Consistency” Questions
Five questions meant to improve uniformity in R&D credit computations make up the brand-new Section E, which the IRS has proposed. These questions call on taxpayers to provide sporadic, although important, information, including:
- How many Business Components generated QREs (Qualified Research Expenses)
- Whether officer wages were included in the credit
- Whether parts of the business were bought or sold during the year
This part points to an IRS movement toward improving the auditability and integrity of R&D credit claims.
Section G – A Game-Changer for Business Component Reporting
Arguably, the most substantial change is the creation of a new Section G, which introduces an extensive reporting framework for business components. This section will require both quantitative and qualitative information for each business component included in the R&D credit claim.
Key Requirements of Section G:
- Type of Component (product, process, software, etc.)
- Purpose of the Research (What knowledge were you seeking?)
- Expense Breakdown by component:
- Employee wages
- Contract research
- Supply costs
- Computer rentals
Furthermore, taxpayers are required to report at least 80% of total QREs in descending order by component value, but no more than 50 components total.
Section G Applicability:
- For the 2024-25 tax year, Section G is optional for all taxpayers.
- Starting in 2025 and onward, Section G becomes mandatory unless the taxpayer meets Qualified Small Business (QSB) criteria under Section 41(h)(1)-(2).
Who’s Exempt from Section G?
- QREs are $1.5 million or less, and
- Gross receipts are $50 million or less at the controlled group level, and
- The Research Credit is claimed on an original filed return.
What Is a Business Component, and Why Does It Matter?
With these changes, it’s evident that the IRS wants greater insight into how businesses determine their Business Components and related qualifying costs.
What is a Business Component?
Under Section 41(d)(2)(B), a Business Component is defined as any:
“product, process, computer software, technique, formula, or invention”
intended for sale, lease, license, or internal business use.
This definition plays a central role in whether activities qualify for the R&D credit, especially since Section 41(d)(1)(C) mandates that “substantially all” research activities related to the component must constitute elements of a process of experimentation. IRS regulations define “substantially all” as 80% or more of the research activities.
Lessons from Recent Case Law
Two recent court rulings provide an understanding of the need for properly defining Business Components and recording related research activities:
Little Sandy Coal Company, Inc. vs. Commissioner
(7th Cir. 2023)
The corporation failed the “substantially all” standard, the court said, so 80% of the alleged R&D activity lacked experimentation. Redefining the elements of the company may have helped it pass according to judicial interpretation.
Leonard L. Grigsby et al. v. US
(5th cir. 2023)
The court pointed out here that the taxpayer neglected to specify a legitimate business component. Although the taxpayer first described components as “products,” the IRS and court determined that building under contract, oil refineries and flood systems did not fit. There wasn’t enough proof of innovation or improvement to rename these as “processes” either.
What Should Businesses Do Now?
Here’s how to prepare:
- Define Business Components early and align with IRS standards
- Document experimentation clearly to meet the “substantially all” requirement
- Start building your Section G reports even if optional in 2024—it’s coming
- Reassess your R&D credit strategy with updated legal and IRS expectations
Why These Changes Matter
The expanded criteria in Form 6765 highlight the IRS’s goal to reduce erroneous claims and increase audit effectiveness. Although the extra reporting responsibilities might seem heavy, they also provide a chance for well-prepared companies to distinguish themselves with accurate, trustworthy data endorsing their efforts at innovation.
Understanding these developments now and acting accordingly will help companies position themselves for ongoing eligibility and success in R&D tax credit claims.
Reach out for a complimentary assessment of your R&D tax credit benefit.
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