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The redesigned Form 6765 (Section G), the officer-compensation rules that trip up founders, and a full reference to the IRC, Treasury regulations, notices, and key cases behind the credit.
Detailed business-component reporting becomes required for most filers. Here’s who’s exempt, and a 30-second check for your situation.
Tax years beginning after Dec. 31, 2025 (2026 returns filed in 2027).
You’re a QSB under IRC §41(h)(3) and check the box to claim the reduced payroll-tax credit.
All three must be true:
QSBs electing the payroll tax credit; taxpayers with QREs ≤ $1.5M AND avg gross receipts ≤ $50M at the control-group level get reduced reporting. Many startup / SMB clients may qualify — worth flagging early.
On amended returns, taxpayers must list each business component, detail qualifying activities, and report QREs regardless of size — the exemptions don't apply. If you work amended returns, this is live today, not just a 2026 problem.
Section G requires identifying each business component — any product, process, software, technique, formula, or invention researched — with wages split by activity type and real records behind them.
| What we now collect | Why it matters |
|---|---|
| Project list with QRE amounts per project | Not just total wages — component-level dollars. |
| Employee role classification per project | Direct researcher, supervisor, or support. |
| Time allocation per project per employee | At minimum, reasonable estimates with a documented methodology. |
| Supplies & contractors tied to specific projects | Not just a general R&D pooled cost. |
| Consistent naming conventions & project codes | Streamlines reporting across every downstream system. |
Form 6765 is the flag, not the evidence. The W-2 shows total comp; the return aggregates. Neither tells you which dollars were research-related — the GL, especially with project codes or cost centers, is the source-document layer between the 6765 totals and the underlying records.
An employee might spend 60% on qualified research and 40% on maintenance. The GL — with project codes / cost centers — shows what was coded to R&D vs. operations. Without it, the IRS can argue your wage allocation is a guess.
Cloud computing, lab materials, and testing environments are QREs too — but they live in expense accounts (software subscriptions, COGS), not on a W-2 or return line. You can't claim them without tracing them.
Payments to third-party developers / researchers appear as vendor payments. Returns aggregate these; the GL breaks them out by vendor and date, letting you tie specific contractor work to specific projects.
| Scenario | On payroll? | QRE eligible? | Notes |
|---|---|---|---|
| CEO / Founder — coding, W-2 wages paid | YES | YES — time-apportioned | Document % of time on QRAs per project. |
| CTO on payroll, full-time R&D | YES | YES — up to 100% | ≥80% QRA time = 100% wages qualify (substantially all). |
| CEO — admin / sales only (W-2) | YES | PARTIAL only | Dual-function rule — only the R&D portion qualifies. |
| Officer — equity only, no payroll | NO | NO | No W-2 = no QRE. Equity compensation is not a wage. |
| Officer — deferred comp (not yet paid) | NO (deferred) | NO until paid | QREs recognized when W-2 wages are actually paid. |
| NSO exercise — W-2 spread at exercise | YES (W-2) | YES — if QRA performed | NSO spread is W-2 income → QRE eligible if time documented. |
| ISO exercise — no W-2 at exercise | YES (cash only) | Cash wages only | ISO exercise creates no W-2 → zero incremental QRE benefit. |
| Non-employee Board Director | NO | NO | Directors' fees (1099-NEC) are not W-2 wages — not QRE. |
of excess QREs over the base
Base: 50% of average QREs from the prior 3 tax years.
of QREs exceeding the base amount
Base: fixed-base % × avg gross receipts from prior 4 years.
Whether a base-period calculation runs depends entirely on the method you choose.
Yes — base period required.
Fixed-base percentage from 1984–1988 QREs and gross receipts (or a startup period if the company didn't exist then). Genuinely burdensome — the main reason most companies avoid it.
No historical base period needed.
Uses average QREs from the prior 3 tax years × 50% as the base amount. That's it — much cleaner, which is why it fits most startup profiles.
Every claimed business component must satisfy all four tests. Contemporaneous documentation is critical.
Must rely on hard sciences — engineering, physical/biological/computer science, or mathematics. Social sciences do NOT qualify.
Must develop a new or improved business component — product, process, software, technique, formula, or invention.
Uncertainty must exist at the outset regarding capability, methodology, or appropriate design.
Must evaluate alternatives via modeling, simulation, or systematic trial and error. GitHub commits, lab logs, and design iterations all help.
Under the new Form 6765, wages for each component break into three buckets — and the distinctions are exam-tested.
The person actually doing the qualified work — hands on the experiment, the code, the design.
First-line management of qualified research (e.g. a scientist supervising lab experiments). Does NOT include higher-level managers supervising the first-line managers.
Services enabling the research — a lab tech cleaning equipment used in qualified research, or a clerk compiling research data.
| QRE type | IRC reference | Notes for startups |
|---|---|---|
| In-house W-2 wages | §41(b)(2)(A) | Primary QRE. Must time-track by project. Includes direct, supervisory, and support employees. |
| Supply costs | §41(b)(2)(C) | Materials consumed in research. NOT capital equipment. Prototype materials qualify. |
| Contract research (65% rule) | §41(b)(3) | 65% of amounts paid to non-employees for qualified research. Company must retain substantial rights. |
| IRC §41 — core provisions | |
|---|---|
| §41(a) | Credit amount — 20% RC / 14% ASC |
| §41(b) | Qualified Research Expenses (QREs) |
| §41(b)(2)(A) | W-2 wages — in-house employee research |
| §41(b)(3) | Contract research — 65% rule |
| §41(c) | Base amount computation |
| §41(d) | Four-Part Test — qualified research |
| §41(d)(4) | Exclusions from qualified research |
| §41(f)(1) | Aggregation — controlled group rules |
| §41(h) | QSB Payroll Tax Offset (PATH Act) |
| §39 | 20-year carryforward for unused credits |
| §52 | Controlled group cross-reference (>50%) |
| §174 | Mandatory R&E capitalization (TCJA 2022) |
| §280C(c) | Reduced deduction election |
| §3111(a) | 6.2% employer SS tax — the offset target |
| §3121(d)(1) | Officers who perform services = employees |
| §3401(a) | Wages definition — QRE eligibility |
| §162(a)(1) | Reasonable officer compensation standard |
| §162(m) | $1M cap — PUBLIC companies ONLY |
| §6511 | 3-yr refund / 941-X statute of limitations |
| Regulations, notices & key cases | |
|---|---|
| Reg. §1.41-2 | QRE definitions and exclusions |
| Reg. §1.41-4 | 4-Part Test analysis & examples |
| Reg. §1.41-4(d) | Contemporaneous records requirement |
| Reg. §1.41-6 | Controlled group aggregation rules |
| Reg. §1.41-8(b) | Payroll offset election — irrevocable |
| Reg. §31.3121(d)-1(b) | Minor services — officer not employee |
| IRS Notice 2017-23 | Form 8974 guidance — payroll offset |
| IRS Notice 2023-63 | §174 TCJA transition guidance |
| Rev. Proc. 2000-50 | Computer software development rules |
| Rev. Proc. 2023-8 | §174 accounting method change |
| PATH Act (P.L. 114-113) | Created §41(h) payroll offset — 2015 |
| TCJA (P.L. 115-97, 2017) | §174 mandatory amortization from 2022 |
| SECURE 2.0 (P.L. 117-328) | Raised offset cap to $500K; Medicare opt. |
| Suder v. Comm'r (T.C. 2014) | Software qualifies; documentation required |
| Siemer Milling (T.C. 2019) | Process of experimentation evidence key |
| Cohan Rule (2d Cir. 1930) | Estimates allowed with imperfect records |
| IRC §6656 | FTD penalties — don't under-deposit |
| IRC §381 | Credit carryover in M&A / reorganizations |
| Reg. §1.41-0 | Master index of all §41 regulations |
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