New Reporting Requirements and Compliance Strategies

ADAM HUNTER: Welcome back. In our last episode, we covered qualifying activities, common pitfalls, and recent legislative changes impacting R&D tax credits. Let's shift gears and talk about reporting. There has also been a lot more rigor introduced with Form 6765.

Can you walk us through what's changed here?

CAROLYN: Yes, and this is one of the most important developments for any company claiming R&D tax credits right now, life sciences or not. The IRS released a substantially revised Form 6765 in early 2025, with final instructions issued on February 6, 2026.

We describe the finalized instructions as the IRS's move to a project-specific disclosure approach. It's not a cosmetic update. It's a fundamental shift in how claims have to be built, documented, and reported on the tax return.

ADAM HUNTER: What are these big structural changes exactly?

CAROLYN: First, the form has been reorganized. Section F is now the hub. That's where you summarize all of your wages, supplies, contract research costs, and cloud hosting costs, if they're included in your claim.

Sections A and B do not show QRE breakdowns anymore. They simply receive the final totals flowing from Section F.

Second, there is a new Section E called "Other Information." Here is where you disclose the total number of business components generating qualified research expenditures, the total amount of officers' wages included as wage QREs, whether you've had any acquisitions or dispositions of major businesses during the year, whether you've identified any new categories of QREs that were not previously claimed, and whether you are safe harboring QREs under the ASC 730 directive.

But the biggest change is the new Section G, Business Component Information.

ADAM HUNTER: Can you walk me through what that looks like in practice?

CAROLYN: Say, Adam, that you're a pharmaceutical company with five active development programs. Under the new Section G, each program is going to be reported as a separate business component.

For each one, you'd list the business component name. For example, "Extended-Release Formulation for Compound XYZ." You would also identify the type of business component, whether it's a product, process, software, or technique.

In addition, you must provide a specific description of the information sought to be discovered. Something like: "Determination of the optimal polymer matrix composition and drug loading ratio to achieve a 24-hour sustained-release profile while maintaining bioavailability above the therapeutic threshold."

Then you break the wage QREs for that component into three categories: direct performance of research, direct support, and direct supervision.

You report 80% of your total QREs in descending order by business component, up to a maximum of 50 components. Anything beyond that is reported in aggregate.

ADAM HUNTER: I think a lot of what you just said goes back to the idea that documentation is critical because, without that information, you won't be able to prepare anything for Section G. When does all of this kick in?

CAROLYN: Adam, you're absolutely right.

Section G is optional for tax years beginning before 2026. For 2025 filings, it's voluntary. But starting with 2026 returns, which most companies will file in 2027, Section G becomes mandatory for most filers.

There are narrow exemptions. Qualified small businesses utilizing the payroll tax credit offset are exempt. Taxpayers with total QREs at or below $1.5 million and gross receipts at or below $50 million who are filing original returns are also exempt.

ADAM HUNTER: What does this mean practically for companies?

CAROLYN: It's a really good question. The audit file is basically the tax return now.

Previously, on Form 6765, you were reporting only quantitative information. Now, you are also including qualitative information and answering many more questions. The IRS is requiring the level of detail in the filing itself that they used to ask for only during an examination.

So, what does good documentation look like? Say you're a medical device company developing a next-generation surgical instrument. You need contemporaneous records evidencing four things.

One, the specific technical uncertainty. For instance, whether the selected titanium alloy can achieve the required fatigue life under cyclic loading conditions while maintaining instrument weight below 180 grams.

Two, the process of experimentation, including design iterations, finite element analysis simulations, bench-testing protocols and results, and prototype evaluations.

Three, who did the work, how much time they spent, and in what capacity. Were they performing primary research, providing direct supervision, or providing direct support?

Four, the supply and contractor costs tied to that specific business component.

Every bit of that has to be traceable back to the Section G disclosure on your Form 6765.

ADAM HUNTER: How is Cherry Bekaert preparing its clients?

CAROLYN: We've been building credit studies at the business component level from the start.

Every engagement produces a Form 6765 Section G-ready workbook, including the business component name, type, information sought to be discovered, wage QRE breakdowns, all already mapped to the form's line items.

ADAM HUNTER: Do you have any final advice for the folks listening at home?

CAROLYN: Don't wait.

If you're a life sciences company claiming R&D credits, don't wait until Section G is mandatory to start building at the business component level. Use the 2025 filing year as your dry run.

Get your documentation systems in order. Train your project teams on what contemporaneous records need to look like, and work with an adviser who understands both the technical tax requirements and the life sciences industry.

Starting now can help transform burdensome Section G reporting from a last-minute compliance exercise into something well-supported and audit-ready.

ADAM HUNTER: That wraps up today's episode on R&D tax credits in the life sciences industry, a topic that's only getting more important as companies plan for the next wave of innovation.

Carolyn, thank you so much for breaking all of this down for us.

CAROLYN: My pleasure, Adam. Thanks so much for having me.

And to everyone listening, we hope you're walking away with something you can put to work right away. We'll see you next time.