Because of the COVID-19 pandemic, things have changed. Thankfully, some of these changes have been implemented as a way to help us. One of these is the employee retention credit (ERC), which the IRS has put up to support businesses and individuals during a crisis.
Through this tax credit, you can get tax relief during a difficult time. But do you know how to write IRS form 6765 for research and development (R&D) tax credits? This article will teach you everything you need to know about completing form 6765.
Form 6765 - Credit for Increasing Research Activities
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How to Write IRS Form 6765
If you are decided to file for the R&D tax credit, you will need to fill up form 6765. This tax form can help you save up to $250,000 on your payroll taxes. Thanks to the Inflation Reduction Act, this amount doubled to $500,000 in 2023.
Unfortunately, before you start writing form 6765, you need to know that not every startup can qualify for the tax credit. You have to understand what the qualified and unqualified R&D activities are.
Qualified R&D activities
The IRS defines qualified research as a technical process for discovering information. The application of the research is intended for developing a new or improved component of the business. You can qualify if you pass this four-part test:
1. Qualified purpose – Your project needs to be defined and specific.
2. Elimination of uncertainty – Your project should legitimately advance the “science” of your products or business. Your team should attempt to get rid of any uncertainties in the development process.
3. Process of experimentation – Your experimentation should be documented using a scientific method or a trial and error process.
4. Technical in nature – Your work needs to be involved in the hard sciences, such as engineering, biotechnology, or chemistry. Computer engineering/science is eligible for the tax credit too.
Unqualified R&D activities
As mentioned, not every R&D activity is qualified for the tax credit. You will have to check with your CPA if your research activities are eligible for the tax break. Some of the general expenses that are not qualified include the following:
- Researching after commercial production begins
- Adopting research of an existing process/product
- Surveys or studies
- Replicating an existing product/process
- Doing research related to specific internal-use computer software
- Research in the fields of arts, humanities, or social sciences
- Research being funded by another individual or government body
- Conducting research outside of the US, Puerto Rico, or a US territory
Form 6765 - Credit for Increasing Research Activities
Download the IRS Form 6765
Below is a preview of IRS Form 6765. Use this form for free when you sign up for a Fill account.
Components of a Standard Form 6765
There are certain parts of form 6765 that you need to accomplish. You will need to know these things when you are drafting IRS form 6765:
Sections A & B
There are two calculation methods that you can use when you are determining what your R&D tax credit is. If you use the traditional method, complete Section A. But if you are using an alternative simplified credit method, Section B is what you need to complete.
Section A is the regular calculation method that has a 20% credit of all current-year qualifying expenses over a certain base amount.
Meanwhile, Section B will require you to derive the difference between your current year’s qualifying expenditure amount and 50% of the average qualifying expenditure over the last three years. The difference then needs to be multiplied by 14% to know what your tax credit is.
Remember that you will only need to complete either section, not both. So make sure to determine which method best works for your company. Whichever method you use, you need to supply it with the appropriate documentation.
Section C
After getting your R&D credit for the current year, you will need to fill out Section C for the other forms and schedules. The amount of your R&D credit should be reported in this section.
Section D
Finally, Section D is where you indicate whether you wish to use all or some of your R&D credit to offset your payroll tax obligation for the existing year. You can get up to $250,000 (or $500,000, depending if the Inflation Reduction Act is still in effect).
Best Strategies When Drafting a Form 6765
If you’re ready for 6765 form creation, follow these steps.
1. Determine if you are eligible for the tax credit.
2. Calculate what your “qualified R&D activities” are.
3. Check if you need to accomplish either Section A or B.
4. Complete Section C.
5. If you are going to avail of payroll offset, complete Section D.
6. Attach the form to your tax return.
7. File and monitor your form 8974.
A lot of business owners tend to make a mistake when writing form 6765. It’s best to work with a CPA so you can be sure you’re doing the correct things.
Using Fill to Create Your Form 6765
Now that you know how to create form 6765, the next thing you have to do is to work with a CPA. You can also start using Fill to help you draft your details onto a template to make the process much easier.
Sign up for a free account today to start drafting your details.
