TaxOps Recommendations to the IRS on Form 6765

by | Mar 10, 2025 | Main Tax Min, Tax Minimization, Tax News

While the updated Form 6765 aims to enhance transparency and accountability, it also presents substantial challenges, particularly for small companies. In a letter to the IRS, Mark Dunning recommends how to address these concerns and create a more balanced and efficient process, ensuring the R&D credit continues to foster innovation and growth.

By Mark Dunning

The IRS’s updated Form 6765 aims to enhance transparency and prevent misuse of the R&D credit, but it also introduces new challenges for companies. In a letter to the IRS, Mark Dunning noted key concerns and provided actionable recommendations to improve the form’s usability and fairness.

Key Points

  • Time estimation concerns and the increased burden on companies
  • Impact on small vs. large companies
  • New information requirements and their implications
  • Positive changes and accommodations for ASC 730
  • Recommendations for Sections F and G

By addressing these issues, the IRS can create a more balanced and efficient process, ensuring that the R&D credit continues to foster innovation and growth. For a deeper dive into these concerns and actionable recommendations, read Mark Dunning’s letter to the IRS.

March 10, 2025

Mark Dunning
Partner, TaxOps
225 Union Blvd, Suite 325
Lakewood, CO 80228

Re: Instructions for Form 6765: TaxOps Recommendations to IRS on Form 6765 

We appreciate the opportunity to provide feedback regarding the tax year 2024 draft and instructions on Form 6765. The IRS’s Form 6765, used to claim the “Credit for Increasing Research Activities”, has undergone significant changes. The goal of these changes has been to enhance transparency and prevent misuse of the R&D credit. The changes, though, have also introduced new administrative burdens and cost for companies of all sizes.

While the goal of transparency, especially with the R&D credit, is commendable, the burden is substantial. The increased burden of this transparency raises the cost and reduces the value of the R&D credit, particularly for small companies. Additional costs to prepare this return can all but wipe out the benefits of claiming the credit for companies with fewer than 10 engineers or software developers. For small companies, managing this process independently is difficult. On a positive note, though, many of the new requirements do level the playing field, making it harder for shady R&D advisors to avoid doing the necessary work and being overly aggressive.

We’ve outlined for the IRS some key concerns and recommendations to improve the form’s usability and fairness, ensuring that it accurately reflects the time and effort required for compliance.

Time Estimation Concerns 

One primary concern with the new Form 6765 is the estimated time required to complete it. The IRS claims it will take the same amount of time as before, yet the form itself is twice as long, making this estimate unrealistic. The draft Form 6765 requires extensive record-keeping, information gathering, interviewing, surveying, and time reporting in order to complete the additional disclosures required. The payroll offset remains beneficial for small and new companies, but the overall workload increase raises the cost while the benefit remains the same. The form itself is not the issue; it is the additional work required.

Estimating the time required is challenging. The 60-hour estimate for Form 3115 may be the best reference point, which is more than three-times what the IRS is estimating for completing the new Form 6765 under the Paperwork Reduction Act Notice.

Moreover, the time necessary to complete the draft form will vary significantly from small to large companies. For instance, Section G, which could be two pages alone for a small company, might be four to six pages in lengthy disclosures for a midsize company, and even 15 to 20 pages for a large company. A large company that chooses to limit disclosures to the first 50 projects must still list those projects with code numbers, which could take 20 to 40 pages.

We recommend the IRS bifurcate the estimated burden by size of company, businesses new to the R&D credit claim process or experienced, and by number of projects for a more accurate view into the time estimates for the new Form 6765.

Accommodation to ASC 730 

The accommodation to the ASC 730 Industry Directive throughout the Form, especially in Section G, is commendable. This approach simplifies the preparation of ASC 730 Industry Directive studies by enabling qualified personnel in cost centers to conduct the studies without needing to examine individual business components, which aligns with the intended design of the ASC 730 Industry Directive.

Sections E, F and G 

Sections E and F introduce new information requirements. For example, Line 38 asks for the amount of officers’ wages, a notable concern is an IRS preference for excluding high-level individuals from qualifying for certain tax benefits. Despite this, the law clearly states that anyone engaged in direct research or direct supervision qualifies. Section G, Lines 50 and 51 specifically request direct research wages and direct supervision wages by business component, which is sufficient. Officers should not be separately listed at all.

Line 39, however, is a positive change, as it informs the taxpayer or R&D firm that their base is changing for the year. This is helpful for inexperienced R&D taxpayers and providers.

Under Section F, “Qualified Research Expense Summary,” the instructions could create situations where Section F may not tie back to Sections A or B on page 1 of Form 6765. The instructions for Section F state that if you are only one company, then put all your QREs (Qualified Research Expenses) here, including wages, supplies, lease computer costs, and outside contractors. The preparer who puts everything in Section F will tie out to page one. If, however, you are a controlled group of corporations, or a separate company in a control group of corporations, preparers are supposed to put in Section F that member’s or company’s totals. As such, Section F may not tie out to page one, which is problematic.

For clarification purposes, we suggest adding bold language to Section F of the form stating “All QREs or Only Member of a Controlled Group’s QREs.” This way, everyone knows that Section F could be a disclosure for a member of a company, which is consistent with Section G, specifically Line 49(a), which quantifies separate company QREs.

The instructions under Section G, Line or Column 49(f), indicate that 49(f) is only required upon filing an amended return. With that in mind, we recommend the following.

  • Remove 49(f) entirely. 49(f) seems to be requesting information that is requiring the “Discovery Test.” Regulation §1.41 – 4(a)(3)(ii) forbids a Discovery requirement in detail. It explains what “discovering information” is and that successfully developing a new or improved business component is not required.
  • If 49(f) remains, add a statement to the section’s description that this is “Only required upon filing an amended return”.

Compliance 

While the updated Form 6765 aims to improve transparency and accountability, it also presents substantial challenges, particularly for smaller companies. By addressing the concerns and recommendations outlined here, the IRS can reduce the practical challenges and improve the clarity and usability of Form 6765 for all companies. This will not only help companies comply more easily but also ensure that the R&D credit continues to serve its purpose of fostering innovation and growth.

Thank you for the opportunity to comment.

Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Please consult your tax advisor for guidance specific to your situation.

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