Has your business invested in designing or developing services, processes, software or products in science or technology? If you answered “yes,” did you know you could earn up to 13.5 cents in R&D tax credit for every qualified dollar? It’s the government’s way of encouraging businesses to commit to innovation.
Today, we will take a close look at how businesses can claim between 6-14% of R&D expenditure by submitting their R&D tax claims as part of their tax return through form 6765. Although the IRS has put together a PDF of instructions to fill out form 6765, it can be difficult to understand the technical jargon and references to Internal Revenue Code throughout the document – trying to wrap one’s brain around the instructions itself can prove frustrating and time-consuming!
We’ve put together the following resource guide to help you better understand what form 6765 is, how to identify eligible R&D expenses and fill out the actual form.
What Is Form 6765?
Form 6765 is used for two key purposes –
1. Calculate and claim one’s R&D tax credits
2. Communicate preference in application of eligible tax credits (i.e. do you want to offset your regular tax, alternative minimum tax or payroll taxes?)
This form must be filed with your business’ income tax – it should NOT be later than the extended deadline for that particular year’s tax return.
Who Should Fill Form 6765?
All businesses, regardless of their structure, must file Form 6765 if they wish to make a R&D claim – this covers individuals, estates, trusts, organizations and corporations, as well as S corporations, partnerships, estates and trusts that allocate credits to shareholders, partners and beneficiaries.
Are Failed Experiments Worth Filing?
Experiments can be very costly in terms of the investment – and, not every experiment proves successful in the end. But, is it a waste? The answer is no – failure actually shows you were certainly conducting R&D. The IRS does not require research to be successful in order to qualify for R&D tax credit – so fill out Form 6765, irrespective of how your experiment performed.
What Factors Should Be Considered When Filling Form 6765?
1. Regular Credit vs. Alternative Simplified Credit
Businesses may claim regular credit in either Section A of Form 6765, or opt for an alternative simplified credit (ASC) in Section B – calculate what your credit is as per both methods and opt for which option gives you the maximum credit you are entitled to. Do note, however, that the alternative simplified credit applies to both the current tax year and all subsequent years, if you elect this method – you cannot revoke the current tax year’s alternative simplified credit selection. If you wish to revoke it for a subsequent tax year, you will need to complete Section A related to the regular tax credit and attach it to Form 6765.
2. Key Difference Between Regular Credit vs. ASC
The regular method covers 20% of qualifying research expenditures for the current year, which exceeds a specific base amount. On the other hand, the alternative simplified credit method is dependent upon calculating the difference between the qualifying expenditure amount for the current year and 50% of the average qualifying expenditure amount for the previous three years – this difference is multiplied by 14% to arrive at the final R&D credit total.
There is also an option at the end of both Section A and Section B to take a reduced credit – this might simplify preparation of a business’ state tax returns.
Need clarity regarding which expenses are eligible? Check out our earlier blog.
3. Supplementation Is Required
After you arrive at your R&D credit for the current year through Sections A and B, you will need to fill out other forms and schedules outlined in Section C to report this figure based upon your particular business structure.
4. Offsetting Payroll Taxes
The final part of form 6765 empowers a small business to use either all or part of their R&D credits to offset payroll taxes – the maximum amount is $250,000. You must replicate the amount you indicate in this section on Form 8974, as well.
