How to Claim the Credit for Increasing Research Activities with Form 6765

Many types of businesses invest in research and development activities to improve their ability to compete and thrive in their respective niches. These activities aren't limited to big technology corporations, scientists and dedicated research organizations, either. Your small business might spend money each year in an effort to improve products or processes, and some of this investment could go toward qualifying research expenses (QREs) that make you eligible to claim the research and development tax credit.

If your passthrough business spends money on qualified research activities (QRAs) then you can file this particular form, the “Credit for Increasing Research Activities” to report these costs and claim a tax credit. The R&D credit, as it is commonly known, can be quite valuable to your business, boosting your bottom line significantly.

Qualified small businesses can even elect to claim an R&D credit of up to $250,000 in the form of a credit against the employer portion of their payroll taxes rather than using the credit to reduce income taxes. (If you elect to offset payroll taxes with the R&D credit then you must file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities with your employment tax return.)

The first step in claiming the R&D credit is determining which activities are considered QRAs. To qualify, the activity must meet four conditions set by the IRS. In general terms, to be eligible the activities must:

1. Relate to a new or improved business component (i.e., product, process, technique, invention, formula or software).
2. Fundamentally rely on principles of engineering, computer science, physical or biological sciences.
3. Be intended to eliminate uncertainty around a product or process (i.e., is it possible? If so, how? Which way would work best?).
4. Involve a process of experimentation (e.g., hypothesis testing, comparison testing, trial and error, modeling, simulation).

You must then determine which expenses associated your research activities are eligible to be treated as QREs. QREs that can be counted or partially counted toward the R&D credit include wages for qualified services, supplies used in qualified research and amounts paid to others to conduct qualified research.