Tag: Form 6765

Developing new products or services or improving the existing ones can be one of the most effective ways to grow a business. Furthermore, having a research and development strategy can lead to innovation and increased productivity and improve a business's competitive advantage.   The Research and Development (R&D) tax credit consistently ranks as one of the most valuable credits leveraged by companies to reap big savings when filing their taxes. At the same time, the credit is severely underutilized due to common misconceptions and lack of information. Therefore, it would be beneficial to employers to understand how the R&D tax credit works and how to use it to maximize tax savings, but also what documentation is necessary for this process, including IRS form 6765. Calculating the R&D Tax Credit While it is commonly believed that only large corporations can claim the R&D tax credit, businesses of any size and across a variety of industries can be eligible. To qualify they need to have engaged in what the Internal Revenue Service (IRS) defines as qualified research expenses (QREs). If a company qualifies for the R&D tax credit, there are standard ways to calculate it, including the regular research credit (RRC) method and the alternative simplified credit (ASC) method. Under the RRC method, the R&D tax credit is worth 20% of the company’s QREs over a base amount, which is a product of a fixed-base percentage and the average annual gross receipts from the past four years. Under the ASC method, the R&D tax credit is worth 14% of the company’s QREs over 50% of its average QREs from the past three years. If there are no QREs from previous years, the credit is worth 6% of the current year’s QREs. Documents Needed For Claiming the R&D Tax Credit Proper documentation is essential for successfully obtaining the benefits of the R&D tax credit, while also avoiding the potential for an audit. Therefore, when claiming the R&D tax credit, businesses should prepare the following: Form 6765, Credit for Increasing Research Activities; A list of R&D activities that qualify for the credit, in accordance with the four-part test; Additional information for QREs, including wage reports, supplies and other research expenses and receipts; Time-tracking information and/or an allocation of employee time for employees whose W-2 taxable wages are being claimed as part of the credit; and Contracts and other subsidiary information in case any elements of the R&D process were outsourced. IRS Form 6765 IRS Form 6765 is used for two key purposes: Calculating and claiming R&D tax credits; and Communicating preference in the application of eligible tax credits. All businesses, regardless of their structure, must file IRS Form 6765 if they want to claim the R&D tax credit. To document their qualified R&D expenses, they complete the four basic sections of the form: Sections A and B - When it comes to choosing the method to use when calculating R&D tax credits, businesses can use either the standard method and fill out Section A, or the alternative simplified credit method and complete Section B. However, the alternative simplified credit applies to both the current tax year and all subsequent years and if businesses elect this method, they cannot revoke the current tax year’s alternative simplified credit selection. To revoke it for a subsequent tax year, it is necessary to complete Section A related to the regular tax credit and attach it to Form 6765. Also, at the end of IRS Form 6765’s Sections A and B, there is an option of electing to take a reduced credit that might simplify the preparation of a business’ state tax returns. Section C - Once R&D credit for the current year is quantified, Section C identifies additional forms and schedules where businesses need to report this figure in accordance with their business structure.   Section D - The final part of IRS Form 6765 is only required for qualified small businesses (QSBs) making a payroll tax election. The amount they nominate in this section should be replicated on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. IRS Form 6765 should be filed with a company’s income tax return no later than the extended due date of that year’s tax return. Adding Value to Businesses with the R&D Tax Credit The primary purpose of the R&D tax credit is to boost economic activity by encouraging companies to innovate and invest in new technologies, products and services, but claiming it is not an easy process. In addition to meeting the tax credit qualification requirements, it must be properly and accurately documented and understanding the IRS Form 6765 is one of the important elements in this process. However, outsourcing the R&D tax credit management makes the entire process of claiming tax credits simple and streamlined. Such an approach provides businesses with experience, technology, resources and ongoing audit support while relieving the burden of monitoring changes in applicable legislation and compliance requirements.