Filing 2022 Form 6765 for the R&D Tax Credit

Form 6765, Credit for Increasing Research Activities, is the tax form businesses use to claim the R&D tax credit. This credit incentivizes research within the United States by allowing companies to receive a dollar-for-dollar reduction of their tax liability based on qualifying expenditures. Filing the form involves determining eligibility, identifying specific costs, and choosing a calculation method. To claim the credit for the 2022 tax year, a business’s activities and expenses must meet the definitions set by the Internal Revenue Service (IRS).

Determining Eligibility for the Credit

To qualify for the R&D tax credit, a business’s research activities must satisfy the Four-Part Test. Each of the four conditions must be met for the associated expenses to be considered for the credit.

• Permitted purpose: The research must be undertaken to create a new or improved business component in terms of its performance, quality, reliability, or functionality. This “business component” can be a product, process, computer software, technique, formula, or invention that the business intends to hold for sale, lease, license, or use in its own trade or business.
• Technological in nature: The process of experimentation must rely on principles of the physical sciences, biological sciences, computer science, or engineering. Activities that rely on soft sciences, such as economics or marketing research, do not meet this standard.
• Elimination of uncertainty: At the project’s start, the business must have been uncertain about the capability or method for developing or improving the business component, or about its appropriate design. The research is meant to discover information that overcomes this technical uncertainty.
• Process of experimentation: The business must demonstrate a systematic evaluation of one or more alternatives to eliminate the technical uncertainty. This can include modeling, simulation, or systematic trial and error, and the process must be documented to show that alternatives were considered and tested.

Identifying Qualified Research Expenses

Once a business confirms its activities meet the Four-Part Test, it must identify the specific costs, known as Qualified Research Expenses (QREs). Only expenditures from three categories, incurred for research within the United States, can be included in the credit calculation.

The first category is in-house research expenses. This includes taxable wages paid to employees for performing, directly supervising, or directly supporting research activities. It also includes the cost of supplies used or consumed while conducting research, such as materials for a prototype. Costs for land, improvements to land, and depreciable property are excluded from this category.

The second category is contract research expenses, which are payments to a third party to perform qualified research on the taxpayer’s behalf. For the regular credit calculation, 65% of these payments can be included, provided the taxpayer retains substantial rights to the research results. The third category involves rental or lease costs of computers used in qualified research, including payments for cloud computing services used to host development environments or run simulations.

Required Information and Calculation Methods

Before filling out Form 6765, a business must gather its QREs for the current tax year and collect historical financial data. The form requires a choice between two calculation methods: the Regular Credit (RC) method or the Alternative Simplified Credit (ASC) method.

The RC method calculates the credit as 20% of the current year’s QREs that exceed a “base amount.” This base amount is computed by multiplying a “fixed-base percentage” by the average annual gross receipts for the four preceding tax years. The fixed-base percentage itself is derived from the ratio of QREs to gross receipts from a historical period, often the 1984-1988 period, making this method data-intensive.

The ASC method is calculated as 14% of the current year’s QREs that are over 50% of the average QREs from the three prior tax years. This method avoids the need for historical gross receipts data from decades ago. A business must have incurred QREs in at least one of the three preceding years to use the ASC.

A change under Section 174 affects the 2022 tax year. Businesses can no longer immediately deduct all research and experimental expenditures. These costs must now be capitalized and amortized over a five-year period for research conducted in the U.S. or a 15-year period for foreign research.

Completing the 2022 Form 6765

With eligibility confirmed, QREs identified, and a calculation method chosen, a business can complete Form 6765. Part I of the form is divided into Section A for the Regular Credit and Section B for the Alternative Simplified Credit; a taxpayer completes only one section. For instance, if choosing the ASC method, the business would enter its average QREs for the three preceding years and its current year QREs to calculate the credit.

Part II is used to sum up the credit, which then flows to other parts of the business’s tax return.

Section D is for a Qualified Small Business (QSB) to make the payroll tax credit election. A QSB is a business with less than $5 million in gross receipts for the current year and no gross receipts for any tax year before the five-year period ending with the current year. On these lines, the business specifies the amount of the R&D credit it elects to apply against its payroll tax liability. For the 2022 tax year, the maximum election was $250,000, which increased to $500,000 for tax years beginning after 2022.

Filing the Form and Claiming the Credit

Form 6765 is not filed by itself but must be attached to the business’s annual income tax return, such as Form 1120 for a corporation or Form 1065 for a partnership.

The credit calculated on Form 6765 is a component of the General Business Credit. The final amount is carried over to Form 3800, General Business Credit, which is used to figure the total of various business credits and any applicable limitations. This completed Form 3800 is filed with the main tax return and Form 6765.

Businesses that elected to take the credit against payroll taxes must take an additional step. After filing the income tax return, the business must also file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form is filed with the business’s quarterly employment tax return, such as Form 941, to claim the credit.