Start Preparing for Mandatory Section G Reporting for 2025

Section G on Form 6765 is optional for all taxpayers for 2024 but will be mandatory for certain taxpayers beginning for tax year 2025. The newly released Form 6765 instructions provide additional guidance for this section. JLKR breaks these requirements down below.

Who will Section G apply to?

Taxpayers that are not an eligible Qualified Small Business (QSB) that are claiming credits to offset payroll tax owed in Section D, or those that have total qualified research expenditures (QREs) of 1.5 million or more and equal to or more than 50 million in current year gross receipts will be required to report the items in Section G. As a refresher, a QSB is a company that has no gross receipts prior to a 5-year look-back period ending with the current year, and that has less than 5 million in gross receipts as defined in Section 448(c)(3) in the year you are claiming the credit. If a taxpayer is considered a member of a controlled group, then all gross receipts from all entities must be aggregated versus just the entity claiming the research credit.

What is Required?

Listing Each Business Component:

Section G breaks down the expenses claimed per business component/project reported in Section E. The total business components in Section E should match those reported in Section G. The business components (or projects) in both sections are limited to those that make up the top 80% of the research expenditures, with a maximum of 50. This means if a taxpayer has a project list of 20, but eight make up 80% of the QREs, then only those eight need to be listed. For taxpayers using the ASC 730 directive, no additional business components need to be listed if the reported amount equals 80% of the QREs.

How do I report business components if I used a stat sample?

Statistical sampling of projects is also allowed per the draft instructions provided the sampling methodology complies with Revenue Procedure 2011-42. In addition, even if a stat sample is used, taxpayers are still required to report the business components that comprise the top 80% of the QREs regardless of whether those projects were included in the statistical sample population. The guidance instructs to indicate stat sample projects by adding “sample” to the end of the business component name. Further, the taxpayer needs to attach a statistical sample plan in a format that complies with the draft instructions.

How should I list the business components?

The business components (again, projects, including the project or job number and name) must be listed from the highest QRE contributor to the lowest up to the 80% threshold.

Controlled Groups:

This section requires that the EIN of the entity or entities performing the R&D activities be reported for controlled groups.

Reporting the “Business Component” and Research Expenditures:

Next, you must report the “business component” as defined in Section 41 of the tax code, such as process, product, technique, formulation, invention, or software. If software, there are additional options that you must select from on the type of software (i.e., internal, external, or dual). Then, in accordance with the “four-part” test, taxpayers must report “the information sought to be discovered” per the listed business component.

Next, per project/business component, you must include each category and amount of research expenditure (wages, supplies, contract research, and cloud lease/rental) for each business component.

Wages must be broken down by the totals contributed by direct, supervisory, or supporting the research. The draft instructions define direct supervision as the “immediate supervision (first-line management) of qualified research.” The example provided is a research scientist who may not perform laboratory experiments but directly supervises the experiments. The instructions further provide direct support examples, such as a laboratory worker that cleans the equipment used in the qualified research, but does not include general admin services or other indirect services, such as compiling payroll for researchers.

The code and form instructions provide general examples, such as those listed above. It is important to note the qualified activities will vary by industry. For instance, for software design activities, custom coding, writing the software program, creating conceptual and integrated software and hardware, and identifying platforms, technologies, tools, or building environments would be considered direct research activities. Activities like testing the software functionalities and providing feedback or technical reviews and guidance to those carrying out the research could be regarded as directly supporting or supervising the research. Whereas for manufacturers, new or improved product design and developing testing and manufacturing methods, such as programming machinery and first-time setups and trial and error, could be considered direct research. Making the custom parts or prototypes and testing them could be treated as directly supporting the research, and directly working with engineers on the design or on the shop floor to guide the final manufacturing process may qualify as direct supervision.

How Should I Keep Documentation for Section G?

If you are not already, you should begin tracking expenses by project or, at a minimum, your largest projects, which comprise 80% of the QREs reported. To meet the requirements of Section G, you will need to track each type of expense versus a lump sum figure. Keeping folders per project to centralize documentation and details in one location may be beneficial. You may also use specific codes to indicate types of research activities or expenses in your general ledger, trial balance, or other financial reporting tools.

Contact Us

As we begin the 2025 tax year, it is important to start documenting your research expenses now to be prepared to comply with the new Form 6765, Section G requirements for filing next year. If you have questions about the information outlined above or need assistance with claiming the R&D credit, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.