What You Should Know Know About Form 6765
The IRS likes to make our life difficult, and the instructions for Form 6765 are no exception. They send readers to the Internal Revenue Code, which you probably aren’t familiar with unless you read it for fun.
Continue reading to find out how to get a tax credit for boosting your research activity. We’ve explained every IRS acronym in plain language and given you all the information you need to be eligible for a tax credit for research-related expenses.
IRS Form 6765: What Is It?
Calculating and claiming Research and Development (R&D) tax credits is done using IRS Form 6765. It offers tax credits for expanding exploratory and research operations related to creating or enhancing procedures, programs, or products.
Internal Revenue Code 41 specifies the guidelines for claiming an R&D tax credit. The credit is provided for qualifying costs associated with acceptable research activity.
Parts A and B
You have two options for how to calculate your R&D tax credit. If you follow the standard procedure, you will finish part A. Do section B if you choose the Alternative Simplified Credit option.
You can only complete sections A or B, not both. Use the one that is most advantageous to your firm after calculating your tax credit using both techniques.
20% of all current-year qualified expenses above a predetermined base amount are eligible for the regular research credit. Determining the base amount requires complex calculations depending on whether you are a startup or an established business.
Finding the difference between the current year’s qualifying expenditure amount and 50% of the average qualifying expenditure for the previous three tax years is required under the alternative credit method. The difference is then multiplied by 14% to determine your R&D credit.
Before calculating Section A or B credits, you must decide whether your expenses qualify as an acceptable research activity.
You can claim a smaller credit at the very end of Form 6765. By choosing this option, the R&D tax credit will be reduced but any unfavorable taxable income adjustments will be removed. Additionally, it may make it simpler to prepare state tax returns.
Section C will point you to further forms and schedules after you’ve calculated your R&D credit for the current year. The amount of your R&D credit must be reported on those forms.
Activities must pass a four-part IRS test to be eligible for the R&D credit.
The conduct must serve a legal objective. So, this indicates that a process or product is being created or improved to enhance its dependability, performance, functionality, quality, or cost-effectiveness.
The activity’s goal must be to remove technical uncertainty. This entails creating or enhancing a process, product, or invention related to design technique, methodology, or formulas.
The experimenting phase is a part of the activity. In other words, the goal is to eliminate or otherwise deal with technical uncertainty. The procedure entails assessing potential solutions and strategies using simulation, modeling, prototyping, trial, and error, or other techniques.
Your credit is affected by the costs you incur while engaging in qualifying activities, such as computer leasing, contractor research, supplies, and employee pay.
Typically, 85% or more of the total qualifying expense is from employee expenses. The remaining amount is for materials and contractor costs. You can deduct 65% of the cost of contractor research.
Although many expenses are eligible, you cannot claim the following:
- After beginning commercial manufacturing
- To adapt an established product for an existing consumer, conduct research
- Replicating an already-existing procedure or product
- Surveys or research in marketing
- Software research for internal use
- Research conducted in a U.S. territory, Puerto Rico, or elsewhere
- Research in the humanities, arts, or social sciences
Make sure you consult your Form 6765 expert to ascertain whether the expenses you indicate are acceptable to the IRS.
The following records are required to submit a Form 6765 claim for R&D credit:
- Credit for Increasing Research Activities, Form 6765
- List of R&D projects that can be credited
- Salary reports
- Research-related expenses and receipts for supplies
- Information on time monitoring or employee time allocation for W-2 taxable pay you are claiming as a credit
- Contracts and other legal records for contracted R&D projects
- Plans, progress reports, test results, and marketing materials that demonstrate how research has impacted and progressed
No matter how their corporation is set up, all businesses must submit Form 6765 to be eligible for the R&D tax credit.
Factors to Take into Account When Giving Credit for Research
Revisions to Form 6765 are happening every year since 2002. This makes it challenging for anyone other than those who handle tax credits with absolute attention to ensure they are computing the maximum amount of credits available.
So, in this continually shifting credit, accounting personnel and Certified Public Accountants may need to catch up. A Form 6765 expert will be knowledgeable about what you may and cannot claim.
Learn More About Form 6765
ERC Today focuses on assisting companies in obtaining tax credits. Contact Your Part Time Accountant if you need assistance with Form 6565 R&D tax credit.
So, by making sure that everything you claim is valid and that you have supporting evidence, we can help you maximize the amount of your claim.