TL;DR: The IRS has rolled out the most significant Form 6765 overhaul in over a decade, introducing three new sections that require project-level detail, business component breakdowns, and compliance-ready documentation. While Section G is optional for 2024, it becomes mandatory for the 2025 tax year for certain businesses. As a result, the compliance burden is about to get very real.

After months of anticipation and multiple draft revisions, the IRS recently finalized the most comprehensive update to Form 6765 (Credit for Increasing Research Activities) since 2009. If your company claims federal R&D tax credits, these changes will fundamentally alter how you document, substantiate, and report your innovation activities.

The bottom line? The days of high-level, aggregated R&D credit claims are over. The IRS wants project-level detail, business component breakdowns, and contemporaneous documentation that can withstand compliance scrutiny. For innovative companies, this isn't just a compliance challenge, but an opportunity to build stronger R&D operations that serve multiple strategic purposes.

What's Actually Changing: The New Form 6765 Breakdown

The updated Form 6765 introduces three new sections that transform how businesses report R&D tax credits:

Section E: Other Information (Required Starting 2024)

This section captures high-level metrics about your R&D activities:

  • Line 37: Total number of business components generating your QREs
  • Line 38: Amount of officers' wages included in QREs
  • Line 39: Whether you acquired or disposed of any major trade or business
  • Line 40: Whether you included new categories of expenses in current year QREs
  • Line 41: Whether you used the ASC 730 Directive for financial statement R&D

Section F: QRE Summary (Required Starting 2024)

This replaces the expense breakdowns that previously appeared in Sections A and B:

  • Wage QREs
  • Supply expenses consumed in research
  • Computer rental/lease costs for qualified research
  • Contract research expenses

Section G: Business Component Reporting (Optional 2024, Mandatory 2025*)

This is the big one. For each business component representing the top 80% of your QREs (up to 50 components), you must provide:

  • Qualitative details: Component name, type (product/process/software), EIN of conducting entity
  • Software classification, if applicable: Internal use, dual function, commercial, etc.
  • Wage QRE breakdown: Direct research vs. supervision vs. support activities
  • Non-wage QREs: Supplies, computer costs, contract research by component
  • Information sought: Description of research objectives (amended returns only)

Who's exempt from Section G in 2025?

  • Qualified Small Businesses claiming the payroll tax credit
  • Companies with ?$1.5M total QREs AND ?$50M gross receipts (controlled group level)

Why This Matters: The Strategic Implications

  1. Audit Protection Through Proactive Documentation

The IRS isn't being subtle about their intent. These changes directly mirror the requirements from Chief Counsel Memorandum 20214101F, which established enhanced documentation standards for R&D credit refund claims in 2021.

What this means: The IRS is essentially requiring audit-level substantiation upfront. Companies that build robust compliance ready systems now will be audit-ready by default.

  1. Business Component Becomes the New Unit of Analysis

Previously, many companies aggregated R&D expenses across broad categories. The new form requires thinking in terms of qualified "business components" including specific products, processes, or software applications that constitute separate research efforts.

Strategic opportunity: This granular view often reveals additional qualifying activities that companies overlooked in aggregate reporting. Proper business component analysis frequently increases total credit value by 15-25%.

  1. Real-Time Substantiation Requirements

The form's emphasis on contemporaneous documentation means you can't reconstruct project details after the fact. Companies need systems that capture R&D activities as they happen.

Compliance imperative: Start building these systems now. Retroactive documentation for 2025+ tax years will be significantly more difficult and less defensible.

Industry-Specific Impact: Who Needs to Prepare

Software and Technology Companies

High impact areas:

  • Developer time allocation between direct research, supervision, and support
  • Cloud computing expense categorization
  • Integration with existing project management tools (Jira, GitHub, etc.)

Action items:

  • Map existing agile sprints and features to business components
  • Implement time tracking that distinguishes research vs. routine development
  • Document technical uncertainty and experimentation for each feature

Manufacturing and Hardware Companies

High impact areas:

  • Prototype development and testing activities
  • Process improvement initiatives
  • Supply expense tracking for R&D vs. production

Action items:

  • Establish clear boundaries between R&D and routine manufacturing processes
  • Implement R&D categorization of supplies
  • Document technical challenges and iteration cycles

Life Sciences and Biotechnology

High impact areas:

  • Clinical trial coordination and data analysis
  • Drug discovery and development processes
  • Regulatory compliance testing and documentation
  • University and federal laboratory collaborations

Action items:

  • Align research phases with business component definitions
  • Track qualified vs. non-qualified clinical activities
  • Document contract research arrangements and applicable rates

Professional Services and Consulting

High impact areas:

  • Custom software development for clients
  • Process innovation and methodology development
  • Technology platform creation
  • Client-specific solution development

Action items:

  • Accurately track client engagement fee terms and rights language
  • Document technical uncertainty in client engagements
  • Establish clear boundaries between R&D efforts and routine client service delivery

The Compliance Burden: What to Expect

Documentation Requirements Have Multiplied

Before: Aggregate qualified expense categories After: Project-level detail including:

  • Technical objectives and uncertainties
  • Methodologies and experimentation processes
  • Personnel allocation by activity type
  • Expense tracking by business component
  • Contemporaneous documentation of research efforts and iterations

Administrative Complexity Is Significant

Based on our analysis of the new requirements, companies should expect:

  • 25-40% increase in Form 6765 preparation time
  • Substantially higher documentation and record-keeping burden
  • Cross-departmental coordination involving tax, finance, legal, and technical teams

Compliance Risk Has Shifted

The IRS has essentially moved compliance-level scrutiny to the filing stage. Companies with inadequate substantiation will face:

  • Delayed processing of refund claims
  • Enhanced audit probability for incomplete submissions
  • Potential credit disallowance for unsupported business components
  • Penalties and interest for inaccurate or inflated claims

Strategic Action Plan: How to Prepare

Phase 1: Assessment and Planning (Next 60 Days)

  1. Inventory Current R&D Activities
  • Map existing projects to potential business components
  • Identify technical uncertainties and experimentation processes
  • Assess current documentation quality and completeness
  • Determine Section G exemption eligibility
  1. Evaluate Documentation Systems
  • Review current project tracking and time allocation methods
  • Assess integration capabilities with accounting and payroll systems
  • Identify gaps in real-time R&D activity capture
  • Plan for cross-departmental data collection workflows
  1. Analyze Resource Requirements
  • Estimate additional compliance costs and time investment
  • Determine internal vs. external resource allocation
  • Budget for technology system upgrades or implementations

Phase 2: System Implementation (Next 90 Days)

  1. Establish Business Component Framework
  • Define criteria for business component identification
  • Create standardized naming and classification systems
  • Develop tracking of technical uncertainty documentation
  • Implement project-level cost allocation procedures
  1. Upgrade Documentation Processes
  • Implement real-time activity tracking systems
  • Create standardized formats for research objective documentation
  • Establish workflows for contemporaneous decision logging
  • Train technical staff on documentation requirements
  1. Integrate Cross-Departmental Workflows
  • Establish regular data collection cycles
  • Create processes for business component classification
  • Develop quality control checkpoints for documentation completeness

Phase 3: Ongoing Optimization (Continuous)

  1. Monitor and Adjust
  • Track documentation quality and completeness metrics
  • Regularly review business component definitions and boundaries
  • Assess system performance and user adoption
  1. Leverage Documentation for Strategic Purposes
  • Use project-level data for R&D portfolio management
  • Apply technical uncertainty analysis to innovation strategy
  • Utilize detailed cost allocation for project profitability analysis
  • Leverage documentation for IP strategy and patent applications

Common Pitfalls to Avoid

Treating This as a Tax-Only Issue

The mistake: Relegating Form 6765 compliance to the finance department without involving technical and project management teams.

Why it matters: The new form requires technical detail that only project teams can provide. Finance departments alone cannot generate the required documentation.

Better approach: Establish cross-functional teams that include technical leads, project managers, and finance personnel.

Retroactive Documentation

The mistake: Attempting to reconstruct project details and technical decisions after the fact.

Why it matters: The IRS specifically emphasizes contemporaneous documentation. Retroactive reconstruction is less defensible and more audit-vulnerable.

Better approach: Implement real-time documentation systems that capture decisions and technical challenges as they occur.

Over-Aggregating Business Components

The mistake: Defining business components too broadly to minimize reporting burden.

Why it matters: Overly broad components often fail the business component test and may not capture the granular technical uncertainty required. Essentially, if an overly broad business component gets disqualified, the entire claim is denied, whereas establishing more detailed, standalone business components reduces this risk

Better approach: Define business components at the appropriate level of technical specificity, typically aligned with distinct research objectives.

Inadequate Personnel Time Allocation

The mistake: Using uniform allocation percentages for employee time across different activity types and roles.

Why it matters: The new form requires specific breakdowns of direct research vs. supervision vs. support activities, which have different compliance implications.

Better approach: Implement detailed documentation that distinguishes between qualified activity types at the individual employee level.

Technology and System Considerations

Integration Opportunities

Effective integrations for accurate compliance:

  1. Project Management Systems (Jira, Asana, Monday.com)
    1. Automatic business component identification
    2. Technical uncertainty documentation workflows
    3. Resource allocation tracking
  2. Payroll Systems (Harvest, Toggl, BambooHR)
    1. Activity-level time categorization
    2. Direct research vs. supervision vs. support classification
    3. Real-time data capture and validation
  3. Accounting Systems (QuickBooks, NetSuite, SAP)
    1. Project-level expense allocation
    2. QRE categorization and tracking
    3. Integration with payroll for wage QRE calculation
  4. Version Control Systems (GitHub, GitLab, Bitbucket)
    1. Development activity documentation
    2. Feature-level technical challenge tracking
    3. Experimental branch and iteration analysis

Automation Opportunities

High-value automation targets:

  • Business component classification based on project management data
  • Time allocation surveys with smart defaults and validation
  • Expense categorization using chart of accounts mapping
  • Documentation compilation for audit readiness
  • QRE calculation with real-time updates and validation

The Boast Advantage: Turning Compliance Into Strategic Value

At Boast, we've been preparing for these Form 6765 changes since the first draft was released. Our platform and expert team help companies not just comply with the new requirements but leverage the enhanced documentation to build stronger R&D operations.

How We Help Companies Succeed

  1. Automated Business Component Identification
  • AI-powered analysis of project management and development data
  • Intelligent mapping of activities to business components
  • Automated technical uncertainty detection and documentation
  1. Real-Time Documentation Systems
  • Seamless integration with existing project management tools
  • Contemporaneous capture of research decisions and technical challenges
  • Automated workflow for cross-departmental data collection
  1. Audit-Ready Substantiation
  • Documentation that exceeds IRS requirements by design
  • Continuous validation of business component qualification
  • Expert review and quality assurance for all claims
  1. Strategic R&D Intelligence
  • Project-level profitability and ROI analysis
  • Innovation portfolio optimization insights
  1. Ongoing Compliance Management
  • Data validation and review
  • Continuous system optimization and improvement
  • Expert guidance on evolving IRS requirements and interpretations

If customers don't currently have these systems in place, our experts can offer guidance and evaluate the best strategy to ensure compliance.

The Bottom Line: Preparation Is Everything

The new Form 6765 requirements represent a fundamental shift in how the IRS approaches R&D tax credit compliance. Companies that treat this as a strategic opportunity to build better R&D operations will thrive. Those that view it as a compliance burden will struggle.

Key success factors:

  1. Start early: Implement systems before 2025 when Section G becomes mandatory
  2. Think strategically: Use enhanced documentation for multiple business purposes
  3. Invest in automation: Leverage technology to reduce manual compliance burden
  4. Get expert help: Work with specialists who understand both the technical requirements and strategic opportunities

The companies that master these new requirements won't just maintain their R&D tax credits: They'll build competitive advantages through better innovation management, stronger documentation, and more strategic R&D investment decisions.

Ready to turn Form 6765 compliance into a strategic advantage? Talk to an expert today and discover how Boast can help you navigate the new requirements while building stronger R&D operations.

Yes, for most taxpayers. Section G is optional for 2024 tax years but mandatory starting in 2025, except for Qualified Small Businesses claiming payroll tax credits and companies with ?$1.5M QREs and ?$50M gross receipts (at controlled group level).

A business component is any product, process, computer software, technique, formula, or invention that is intended to be sold, leased, licensed, or used by the taxpayer in its trade or business. Each component should represent a discrete research effort with distinct technical objectives.

For 2024-2025, this is only required for amended returns claiming increased credits. The IRS has indicated that taxpayers should “use the space provided” on the form, suggesting concise but specific descriptions of research objectives and technical uncertainties.

Yes, but with limitations. Companies using Rev. Proc. 2011-42 statistical sampling must report the top 80% of total QREs (up to 50 business components), regardless of whether those components were included in the original sample. This can create significant additional documentation burden.

The form requires specific breakdowns based on actual employee activities. Direct research involves hands-on experimentation and development. Supervision includes direct oversight of qualified research activities. Support includes activities that directly facilitate research but aren’t hands-on experimentation. Time tracking systems should capture these distinctions contemporaneously.

Inadequate documentation could result in delayed processing, enhanced audit scrutiny, or potential credit disallowance. The IRS has indicated these requirements are designed to improve claim quality and reduce fraudulent submissions.

Yes. Inaccurate or inflated claims can result in penalties, interest, and potential fraud allegations. Given the increased scrutiny, documentation quality and accuracy are more critical than ever.

Many states have their own R&D credit programs with different documentation requirements. The enhanced federal documentation may actually help with state compliance, but companies should review each state’s specific requirements.

Consider completing Section G for 2024 if you have the documentation available, as it demonstrates proactive compliance and can help identify process improvements before the 2025 mandatory deadline. However, ensure accuracy rather than rushing incomplete information.