Understanding IRS Form 6765: the R&D Tax Credit Form

So you've got all these ideas on how to expand your business. You want to dive into research, develop innovative products, and really make your startup stand out.

There's just one problem: You need money.

But don't stress yourself out just yet.

Companies in the hard sciences might qualify for the Research and Development (R&D) tax credit — a tax incentive that basically pays you to conduct research and development activities within the U.S.

And if you qualify, all you have to do is fill out Form 6765.

I know, I know... Filling out forms is boring. But I'm here to help you out.

Let's answer some questions about IRS Form 6765 and find out how you can use it to maximize your tax savings.

What is Form 6765?

Form 6765 is an IRS Form (found in U.S. Code, Section 280C). It's also known as the "Credit for Increasing Research Activities" or R&D Tax Credit Form.

Research and development companies within the United States file Form 6765 to receive project funding. That funding comes from (you guessed it!) the Research and Development tax credit.

The R&D tax credit offsets payroll taxes — lowering the employer's share of social security payments and the burn rate of an underperforming business.

Who Is Form 6765 For?

Form 6765 is for startups that engage in eligible research and development activities.

It helps startups reduce their payroll taxes by up to $250,000. (Thanks to the Inflation Reduction Act, this amount will double to $500,000 in the 2023 tax year).

Who Is Eligible to File Form 6765?

An eligible startup must meet most of these criteria:

• Delaware C-Corporation
• Venture-backed
• Employs Engineers (Software, Mechanical, Chemical, or otherwise)
• Hires Domestic R&D Contractors
• Utilizes Amazon Web Services, or a similar Cloud Computing Hosting Platform
• Purchases supplies and hardware components to build a new hardware product
• Has secured or will secure patents
• Incorporated within five years
• Falls within the Software, Hardware, Clean Energy, or Biotechnology industries
• Generates less than $5M in revenue, or no income at all

What Are "Qualified" R&D Activities?

According to the IRS, qualified research presents something new and innovative.

Technical information discovery and application must be used to create a new or better business component for the taxpayer.

The IRS has a four-part test that determines whether your research qualifies:

1. Qualified Purpose: The project's purpose must be clear and focused — aiming to advance your company's products or services
2. Elimination of Ambiguity: Your team tries to remove uncertainty from the project's development process
3. Process of Experimentation: You must prove that your experiments are scientific or involve trial and error
4. Technical: This work must have a solid foundation in the hard sciences, such as engineering, chemistry, or biology (e.g., SaaS businesses)

What About "Unqualified" R&D Activities?

Not all research counts.

So, where do you fall into all this?

Let's see. Here are some costs that typically don't qualify:

• Research performed after the beginning of commercial production
• Research adapting an existing product or process to a particular customer's need
• Replica/Duplication of a current product or process
• Surveys or studies
• Research relating to specific internal-use computer software
• Research performed outside the United States, Puerto Rico, or a U.S. possession
• Research in the social sciences, arts, or humanities
• Research funded by another person (or governmental entity)

You can always ask your CPA if you're not 100% sure.

Why Should I File Form 6765?

The answer's simple: if you qualify for Form 6765, you can get up to $250,000 in cash refunds — even if your startup lacks revenue or is running at a loss.

(I mean, who doesn't want free money?)

What Documents Do I Need to Claim the R&D Tax Credit?

You need the following info to claim the R&D tax credit:

• Credit for Increasing Research Activities, Form 6765
• A list of R&D activities that satisfy the four requirements and are eligible for the credit
• Additional data for QREs, such as payment reports, supply costs, and other research expenses and receipts
• For workers whose W-2 taxable wages are being claimed as part of the credit, time tracking data, an employee time allocation
• Contracts and any supporting data in case any R&D process steps were outsourced

I know this looks like a lot, but I think we can all agree that you don't want to get audited. So, have the right documents ready, and you won't have to worry about it.

How Do I File the Form 6765?

Form 6765 is filed with the 1120 package — aka the Annual Income Tax Return for C-Corporations.

Form 6765 is also accompanied by two forms that are filed quarterly after the 1120 package:

• Form 3800: General Business Credit
• Form 8974: Qualified Small Business Payroll Tax Credit for Increasing Research Activities

When Should I Start Filing Form 6765?

You should submit or extend Form 6765 before April 15 each year to qualify for the cash-back payroll tax credit.

You have until October 15 of each year to file if the 1120 package is extended.

What Happens if I Missed the Deadline for Form 6765?

If you submit your paperwork late, you lose the cash-back payroll tax credit of up to $250,000. (The Inflation Reduction Act will raise the maximum tax credit to $500,000 in 2023).

That's a lot of money! Make sure you file Form 6765 on time to avoid missing out.

Do I Need to Have an R&D Software to File Form 6765?

No, not really.

You can complete Form 6765 yourself or with a software program like Intuit TurboTax and submit it on your behalf.

Note: This form is probably the leading cause of IRS audits of underperforming. So, just remember to finish the 1120 package in its entirety and provide all necessary documentation.

File Your Form 6765 with Fondo

Filing taxes is a pain. I get it.

If Form 6765 is stressing you out, Fondo can help. Over the years, we've lifted this burden off the shoulders of many startup CEOs.

Our dedicated team can help you with filing Form 6765 and provide answers to all your tax-related questions.