Form 6765 instructions for founders

IRS Form 6765 is the tax document used to claim the federal Credit for Increasing Research Activities. For startup founders, the form 6765 instructions require calculating your Qualified Research Expenses (QREs) in Section F, selecting between the Regular Credit in Section A or the Alternative Simplified Credit (ASC) in Section B, and claiming up to $500,000 in payroll tax offsets in Section D if your startup is pre-revenue or pre-profit. You must also complete the detailed business component breakout in Section G unless your company is exempt under specific revenue and QRE thresholds.

Choosing between Section A and Section B

The IRS offers two methods to calculate your R&D credit. Most software startups choose Section B, which is the Alternative Simplified Credit (ASC).

The Regular Credit under Section A requires you to track gross receipts and R&D spend going back several decades. This is often impossible or impractical for early-stage companies.

Section B relies only on your current-year expenses and your R&D expenses from the prior three tax years. The ASC rate is 14% of your current-year QREs that exceed 50% of your average QREs from the past three years.

If your startup did not have any R&D expenses in any of the three prior years, your ASC rate is 6% of your current-year QREs. Make sure to choose the method that maximizes your tax savings. You can model your potential savings before making this choice. Estimate your credit in the calculator.

Understanding the Section 280C election

Line 26 of Section B is where you make the Section 280C reduced credit election. This election is a crucial decision for founders because it changes how the credit affects your taxable income.

If you do not make the election, you must reduce your deductible R&D expenses by the full amount of the R&D credit you claim. This can increase your taxable income, which might trigger an unexpected tax bill if your startup is close to profitability.

Making the Section 280C election reduces your credit to 79% of its original value. In exchange, you get to keep your full R&D expense deductions. This is usually the preferred path for startups because it simplifies tax calculations and avoids immediate tax hits.

Section D and the payroll tax offset election

Unprofitable startups cannot use an income tax credit to lower their tax bill because they do not owe income tax. Section D allows Qualified Small Businesses (QSBs) to convert up to $500,000 of the credit into a quarterly payroll tax offset.

To qualify as a QSB, your startup must have under $5 million in gross receipts for the credit year. Additionally, you cannot have any gross receipts for any tax year prior to the five-year period ending with the credit year.

You must make this election on a timely filed original tax return by checking the box on Line 33a and entering the elected amount on Line 34. This election cannot be made on an amended return. Read more about how to claim the payroll tax offset.

Once elected, you claim the offset quarterly using Form 8974, which you attach to your quarterly Form 941 filings. This offset begins in the first quarter after you file the income tax return containing the election.

Section F and documenting qualified expenses

Section F is where you summarize your Qualified Research Expenses (QREs) for the year. The IRS breaks these down into four main buckets: wages, supplies, cloud compute, and contract research.

Line 42 is where you enter qualified wages, which must be split into direct research, direct supervision, and direct support. Line 44 covers computer rental or lease costs, which is where you report your cloud hosting and infrastructure expenses for development environments.

Line 45 covers qualified contract research. Only US-based contractors qualify, and their costs are included at 65% of the amount you paid them. Learn more about how US contractors qualify.

Your total QREs are summed up on Line 48. This final figure is then used to feed the calculations in either Section A or Section B of the form.

Section G and the new component detail

The IRS introduced Section G to collect granular data on individual business components. A business component is typically a distinct product, feature, or software module that you spent time developing.

For tax years beginning before 2026, Section G is optional for all taxpayers. For tax years beginning after 2025, Section G is mandatory unless your startup meets certain exemption criteria.

The two main exemptions are designed to protect smaller businesses from this heavy administrative burden. You do not have to fill out Section G if you make the Section D payroll tax offset election. You are also exempt if your total QREs are $1.5 million or less, and your average annual gross receipts for the prior three years are $50 million or less.

If you do not meet an exemption, you must report individual details for components covering at least 80% of your total QREs, up to a maximum of 50 components. This requires splitting your wage QREs for each component into direct research, direct supervision, and direct support. Access our deep dive for a line-by-line breakdown of these sections.

Section E other information reporting

Section E requires you to disclose high-level operational details about your R&D activities. This section contains several lines that help the IRS assess the scale of your claim.

Line 37 asks for the total number of business components you are claiming. Line 38 requires you to report any officer wages that are included in your wage QREs.

This section also asks whether you acquired or disposed of any major portions of a business during the tax year. Accurate reporting here is essential because major corporate changes can alter your historical gross receipts and average R&D spend.

Streamlining your tax filing

Claimship is software built to automate the time-consuming process of pulling technical data for your R&D study. By connecting directly to your GitHub, Linear, Jira, and Slack history, the software maps your engineering work to specific business components.

Our platform generates the full technical report and prepares the complete Form 6765 package. Your CPA can then review the package and file it directly with your annual tax return. See how Claimship compares to a traditional accounting firm.