How Tech Startups Can Prepare Now for Changes to the R&D Credit Tax Form

Proposed changes to the Federal Research and Development (R&D) Tax Credit form (Form 6765) will increase reporting requirements at the time of filing for the credit. This change will affect all companies that apply for the credit, but smaller businesses and startups could feel the biggest impact.

The changes were first proposed in September 2023 and subsequently revised in June 2024, with the latter version likely to become permanent. The new requirements will be optional for all businesses in 2025 (filing for 2024 taxes) but will be required in 2026 (filing for 2025 taxes). The new form will increase the administrative burden required to claim the credit, so qualified companies may need to re-evaluate how they approach the credit claim to minimize their audit risk while maximizing benefits.

What is the R&D Tax Credit

The R&D Credit is a tax credit that provides a dollar-for-dollar reduction in taxes owed for companies performing research, development and innovation in the U.S. Any business developing or improving a product, process, formula or software may be eligible. The R&D credit can be especially beneficial to technology startups, as businesses with less than $5 million in gross receipts that have been in business for fewer than five years can use the R&D credit to offset payroll taxes.

What to expect from the new form

While the proposed form requires a range of new information, both quantitative and qualitative, the most substantial change is the introduction of a new section (Section G) requiring extensive information about the taxpayer’s R&D “business components.” Business components are how a taxpayer’s activities and expenditures that qualify for the R&D credit are categorized in the calculation of the credit.

For software companies, an example of a business component is typically the software product or platform being developed or improved. In addition to financial information reflecting the expenditures included in the credit claim, taxpayers will also be required to explain the nature of the research and development activities they conducted.

The initial version of the new form would have required Section G for all taxpayers; however, the most recent update will allow smaller businesses falling below a specified threshold to opt out of completing Section G. Specifically, this section will be optional for taxpayers that meet the definition of a Qualified Small Business using the credit to reduce payroll taxes that also have total Qualified Research Expenditures (QREs) of $1.5 million or less and gross receipts of $50 million or less. Many startups will fall into this category, which makes it less time consuming and less costly to claim the R&D credit.

How startups and small businesses can prepare for these upcoming changes today

Every business that interacts with the new Form 6765 will undoubtedly experience a learning curve, which is why the IRS is making the new form optional for all taxpayers in 2025. This transitional year will afford businesses the opportunity to acclimate to the new requirements and assess the need for any changes in recordkeeping processes, which will be particularly crucial for small businesses and startups. Companies planning to continue claiming the R&D credit, especially startups, should take the following steps in 2025 to prepare:

1. Determine if your company falls under the threshold that will allow you to opt out of Section G. There can be nuances in meeting these qualifications, so it is best to consult with an R&D Tax Credit advisor to assess your company’s status.
2. Conduct a review of your current recordkeeping and calculation processes for the R&D Tax Credit. Smaller companies with historically simpler R&D credit claims may not be regularly tracking all the information that will soon be required to claim the credit. Calculating the credit for technology companies will require detailed records related to all wages, including those paid to contractors within the U.S., as well as detailed records on expenditures, such as cloud costs, and documentation supporting the iterative research activities, such as JIRA tickets from the tax year in question. A tax credit specialist will be most knowledgeable about the types of business records and documentation that satisfy the requirements of the new form and can consult on new processes to make the compilation of that information as seamless and painless as possible.
3. Find the tax credit advisor that is best suited to your company. Not all tax advisors are created equal, especially when it comes to specialty tax credits like the R&D credit. You need an advisor who is uniquely qualified to maximize your credit benefit and help you navigate compliance, especially during a time of shifting requirements. Small businesses and startups will benefit even more from an R&D credit specialist attuned to their unique business needs.  

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Aprio is the brand name under which Aprio, LLP, and Aprio Advisory Group, LLC, deliver professional services. Since 1952, clients throughout the U.S. and across more than 50 countries have trusted Aprio for guidance on how to achieve what’s next. As a premier business advisory and accounting firm, Aprio Advisory Group, LLC, delivers advisory, tax, managed and private client services to build value, drive growth, manage risk and protect wealth, and Aprio, LLP, provides audit and attest services. With proven experience and genuine care, Aprio serves individuals, entrepreneurs, and businesses, from promising startups to market leaders alike. Aprio has grown to 2,000+ team members providing solutions to clients in industries including manufacturing and distribution, non-profit and education, professional services, real estate, construction, restaurant, franchise and hospitality, government contracting and technology and blockchain.

Carli Huband, Partner-in-Charge of Aprio’s Specialty Tax Group, helps manufacturing, technology, and engineering clients save millions of dollars every year through R&D Tax, State & Local Tax, M&A Tax, International & Federal Tax Consulting.