Published November 9, 2026 | Accounting Today
Introduction
The Internal Revenue Service introduced a heavily modified Form 6765 for the Credit for Increasing Research Activities, commonly known as the R&D Credit, for 2024.
Following its release, there was significant pushback regarding the volume of information requested on the new Form. The IRS later provided in its instructions that Section G, which requested the most detailed information, would be optional for taxpayers for the 2024 tax year. The remaining changes to Form 6765 were required beginning with the 2024 tax year.
Before the changes were implemented for the 2025 tax year, the IRS again stated that Section G would remain optional for all taxpayers.
Beginning with the 2026 tax year, Section G will be required unless a taxpayer meets one of the stated exceptions.
Who needs to use Section G in 2026?
Section G will be required for most taxpayers in 2026.
The first type of taxpayer exempt from furnishing Section G is a qualified small business taxpayer electing the payroll tax credit option, rather than using the R&D credit against income tax. This subset of taxpayers could have an article written about them, but suffice it to say, these taxpayers are typically true start-ups that have little to no revenue.
The only other way for taxpayers to be exempt from Section G is if:
- The total Qualified Research Expenses “QREs” for the taxpayer, including all members of a controlled group, are equal to or less than $1.5 million;
- The average annual gross receipts for the prior three tax years are equal to or less than $50 million; and
- The research credit is being reported on an original return.
Unless a taxpayer falls within one of these two exceptions, Section G is required for the R&D Credit for the 2026 tax year.
For CPAs advising clients that claim the credit, the analysis makes it important to understand not only whether Section G applies, but also what information clients will need to provide when it does.
What is Section G?
Section G is the portion of Form 6765 that addresses the identification of the business components related to the R&D credit, along with the quantification of the QREs associated with those business components.
So, what are business components?
Business components are defined under Internal Revenue Code (“IRC”) § 41(d)(2)(B) as any product, process, computer software, technique, formula, or invention that is held for sale, lease, or license, or used by the taxpayer in its trade or business. Note that manufacturing processes are defined as a separate business component from the products they are used to produce.
The instructions for Form 6765 indicate that, rather than having to break out each type of business component, the taxpayer will be able to select Product, Process, or “All Others” as the type of business component. This selection makes sense, as the most common types of business components are products and processes.
What about software?
Software is its own business component under IRC § 41(d)(2)(B). However, there are additional rules and exceptions associated with software qualification.
The IRS takes this into consideration and requires taxpayers to identify the business component not only as “All Others”, but also, on Line 49(e), to identify the type of software:
- Internal use software (“IUS”)
- Dual function software (“DFS”)
- Non-IUS
- Excepted from IUS treatment
If a taxpayer is unfamiliar with these terms and simply selects a classification without fully understanding it, that decision could create issues later in the event of an audit.
What is reported, specifically, in Section G for Business Component Identification?
As discussed above, taxpayers must identify the type of business component and, in the case of software, the type of software being qualified.
The example Section G on the Form has space for fifteen business components. However, this can be misleading, as taxpayers are required to list and report the top 50 business components or the number or business components representing 80% percent of the QREs, whichever is less.
Consequently, if eight business components represent 80% of the QREs, the taxpayer would report only those eight business components on the Form, followed by a final line item for “Aggregate Business Components.”
If the taxpayer had 100 business components, all with equal QREs, the taxpayer would report 50 business components on the Form, followed by a final line item for “Aggregate Business Components.”
Business components should be listed on the Form in descending order based on aggregate QREs.
Once the number of business components to be reported has been determined, taxpayers begin by identifying the company to which each business component is attributed if the taxpayer is a member of a controlled group.
If the taxpayer is not a member of a controlled group, it would simply enter its own EIN on each line.
Next, for each business component, the taxpayer must enter the principal business activity code for the entity generating the business component.
After providing the company information, the taxpayer identifies the business component name or unique alphanumeric identifier.
The IRS instructions indicate that “this field should be populated with an identifier that is consistent with how the taxpayer maintains the books and records that substantiate the qualified research activities and associated QREs.”
The challenge is that many businesses do not track their research activities and QREs by business component. Instead, many taxpayers track activity using project name or identification number.
If the name or identification number refers to a single business component, this may be straightforward. However, many projects consist of numerous business components.
For example, a company developing a new product may also have to develop the manufacturing process used to produce that product, while tracking both as a single project. In reality, the activities and QREs associated with the product and the process must be separated.
The final item before listing the QREs by business component is a request to “Describe the information sought to be discovered. Use the space provided.”
Currently, this is only required when the credit was not claimed on an original return. Consequently, timely filed returns, including extensions, do not need to complete Line 49(f).
Amended returns have requested this information for several years. However, there has historically not been a “Use the space provided” requirement.
The space provided on the Form is only one line tall and approximately half a page wide. In practice, that leaves very limited room for a meaningful description. A brief phrase may be all that can reasonably fit, which could create challenges if the IRS determines that the description provided is insufficient.
How are the QREs broken out in Section G for 2026?
There are only four expense categories that can be captured towards the R&D Credit:
- Wages
- Supplies
- Rental or lease cost of computers
- Contract research expenses
For the most part, Section G requires taxpayers to list the aggregate amount of each expense category for each reported business component.
There is one significant exception: wages.
Instead of simply listing wages in the aggregate, taxpayers are required to break out wages among:
- Direct research for qualified services,
- Direct supervision of qualified services, and
- Direct support for qualified services.
Each of these are explained in IRC § 41(b).
With the new reporting requirements, it becomes especially important to correctly identify the applicable category of qualifying wages. Incorrect classification could create additional questions or scrutiny regarding the amounts claimed.
Impact and conclusion
Taxpayers need to exercise care when calculating and reporting their R&D credits.
The additional information required in Section G gives the IRS considerably more detail regarding the activities, business components, and expenses underlying a taxpayer’s credit. The IRS has been moving towards this approach for the last several years in its exam process.
Preparing this level of information in time for a non-extended return may also create additional challenges for many taxpayers.
For CPAs and other trusted advisors, the 2026 requirements create an opportunity to help clients assess whether their current processes capture the business component, technical, and financial detail needed to complete Section G accurately.
Clients who historically tracked R&D activity at the project level may need to determine whether those projects contain multiple business components. The earlier these conversations happen, the easier it may be to identify where additional information or specialized support is needed.
Help Your Clients Prepare for the 2026 Form 6765 Reporting Requirements
ABGi USA’s R&D Tax Credit experts work alongside CPAs and their clients to evaluate qualifying activities, quantify qualified research expenses, and organize business component information for R&D Tax Credit claims.
If your clients may be affected by the 2026 Section G reporting requirements, ABGi USA’s team can help them understand what the changes mean for their R&D Tax Credit process and determine the appropriate next steps.
