Like many government-backed tax programs, the research and development tax program is both complicated and ever-evolving. Many business owners struggle to stay up to speed on the latest requirements and regulations. As a result, it's challenging to calculate the innovation tax credit without the help of a professional tax team that specializes in research and development benefits.
Beyond QREs: Business Owners Should Know the Basics About Form 6765
Partnering with a skilled R&D tax credit firm is the best way for qualifying businesses to optimize the cash flow opportunities and incentives offered through the Section 41 benefit. However, entrepreneurs and executives must still be part of the process. Beyond recognizing the qualified research expenses (QREs) that your business incurs throughout the year, you should also be familiar with IRS Form 6765.
Form 6765 is required for all businesses filing for the federal research and development tax credit. This government document is separated into four sections. Qualifying taxpayers will fill out segment A or B as well as C and potentially D. A basic breakdown of each section on Form 6765 includes:
Section A: Regular Credit
Claiming the Regular Credit for research and development operations can be complex. However, a simple definition of the process is that the Regular Credit is essentially 20 percent of the taxpayer's current-year QREs that extend beyond a calculated base sum.
Section B: Alternative Simplified Credit
As its name implies, the Alternative Simplified Credit (ASC) offers taxpayers an alternative method to calculate available research and development tax credits. Additionally, the ASC broadens eligibility for many business owners, allowing organizations to claim the credit even if their current year expenses don't meet the regular credit calculation threshold. Unlike the regular credit's 20-percent rate for current-year qualifying research expenses, the ASC rate is 14 percent of the total of QREs that surpass 50 percent of the average QREs for the previous three tax years.
Note: The best way to determine whether your business should complete Section A or B is to run the calculations for both, opting for the method that yields the biggest final credit benefit.
Section C: Current Year Credit
After you've calculated your business' current-year research and development tax credit in either Section A or Section B of Form 6765, you can fill out Section C to identify any additional forms and schedules that warrant reporting based on your business structure. For many taxpayers, the majority of Section C can be ignored; however, it's essential to consult with an experienced R&D tax professional to ensure everything relevant is included when filing.
Section D: Qualified Small Business Payroll Tax Election and Payroll Tax Credit
Section D only requires completion from taxpayers making the payroll tax election for their small businesses. To make the payroll election, a company must meet the requirements of a Qualified Small Business, which includes having less than $5 million in revenue and did not have revenue five years prior to the year in which the election is being made. Designated small businesses can apply as much as $250,000 of research credits to offset payroll tax obligations.
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Acena Consulting helps businesses leverage the R&D tax credit benefit to drive cash flow and operational return on investment. Contact our team of accounting specialists today to learn more.