Form 6765 Section G: What CPAs Need to Know Before It Becomes Mandatory

The IRS finalized updated instructions for Form 6765, Credit for Increasing Research Activities, in February 2026. The most meaningful change is Section G, a new component-level reporting requirement that requires taxpayers to itemize qualified research expenses (QREs) by individual business component, dividing wages into three categories: direct research, direct supervision, and direct support.

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Section G is optional for tax year 2025. For tax year 2026, Section G is mandatory for taxpayers that are not qualified small businesses or have over $1,500,000 in QREs, determined at the control group level, and/or 50 million in gross receipts, as determined under Section 448(c)(3) (without regard to subparagraph (A) thereof).

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That distinction matters less than it might appear. CPAs who treat Section G as a 2026 problem are setting their clients up for a difficult filing season. The information Section G requires is not something that can easily be reconstructed at filing time. It should be tracked during the year the taxpayers perform the research.

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What Section G Actually Requires

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Under the finalized Form 6765 instructions, Section G requires taxpayers to report QREs by business component, listed in descending order of cost, until the reported components represent either 80 percent of total QREs or fifty (50) business components, whichever comes first.

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For each business component, the taxpayer must identify:

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• The name of the business component

• The type of business component (product, process, software, technique, formula, or invention)

• The phase of research (development, improvement, or both)

• Total QREs attributable to that business component

• Wages broken into three subcategories: wages for employees directly performing research, wages for employees directly supervising research, and wages for employees directly supporting research

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Companies have historically tracked their R&D activities at a summary level; this method is no longer acceptable. The new business component level tracking of  Section G requires taxpayers to identify individual business components and report QREs associated with those components. As a result, taxpayers claiming the credit should evaluate whether their documentation supports the identification of business components as defined in IRC Section 41(d) and the allocation of QREs to those business components.

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Why Early Preparation Matters

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Although Section G is optional for tax years beginning before 2026 (prior to 01/01/2027), taxpayers that expect to be subject to the requirement in future years may benefit from evaluating whether their current documentation processes can produce the information the Form 6765 requires.

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To recap the earlier statements, Section G requires taxpayers to report QREs at the business component level, including separate reporting of wages attributable to employees directly performing, directly supervising, and directly supporting qualified research. For some taxpayers, this level of detail may not be captured through existing payroll systems, project accounting records, or contemporaneous documentation practices.

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As a result, CPA firms advising taxpayers claiming the research credit need to determine whether there is a need to assess their clients’ current recordkeeping procedures and determine if they can identify and allocate QREs to business components. Establishing documentation procedures before Section G becomes mandatory may reduce the amount of reconstruction required when preparing future returns.

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The Wage Allocation Question Is Where Claims Get Complicated

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Of the changes Section G introduces, the three-way wage allocation is the topic that creates the most operational complexity for clients.

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Under IRC Section 41(b)(2)(B), qualified services include direct research activities as well as direct supervision and direct support of those activities. Taxpayers have claimed all three categories as QREs for years. Most companies, however, track employee time at the activity level rather than the functional role level, and some smaller companies have not tracked it at all beyond a rough percentage of time allocation.

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Section G now asks for wages to be separated into:

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• Direct research: Wages paid to employees conducting the qualified research, including design, testing, experimentation, and development activities.

• Direct supervision: Wages paid to employees who directly supervise the employees conducting the research. These QREs must be for first-line management of the research effort and do not include general management or administrative oversight.

• Direct support: Wages paid to employees who directly support the research activities, such as laboratory technicians, research assistants, or support staff whose work is directly supporting those who perform qualified research.

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The wage definitions come from Treas. Reg. Section 1.41-2. The line between supervision and support, and between support and non-qualified activity, is one area where IRS examinations may focus.

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CPAs advising clients through this transition should evaluate whether existing time-tracking systems can produce this level of granularity; many systems do not track this level of detail. Implementing a simple time-coding system now, even informally, creates a more easily defensible contemporaneous record and significantly reduces the burden at filing time.

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Section G and the Broader Shift Toward Project-Level Documentation

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Section G expands the amount of information reported on Form 6765 by requiring disclosure of QREs at the business component level. Taxpayers claiming the credit should ensure that their documentation is sufficient to substantiate the existence of qualified research activities, the identification of business components, and the allocation of QREs reported on the return.

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The updated Form 6765 instructions also tie the form more directly to IRC Section 174A, which was added by the One Big Beautiful Bill Act (P.L. 119-21) and governs the deduction of domestic research and experimental expenditures. CPAs filing returns for 2025 and beyond need to ensure that the QREs claimed on Form 6765 are consistent with how the client has treated the same expenditures under Section 174A, including any elections or transition procedures under Rev. Proc. 2025-28.

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Practical Steps for CPAs

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Clients who align their research credit documentation infrastructure for Section G will experience the least amount of disruption.  That means:

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• Mapping business components before year end. A business component under IRC Section 41(d)(2)(B) is the product, process, software, technique, formula, or invention that the research is intended to develop or improve. For most companies, a component map can be built from existing project lists or development roadmaps. Taxpayers that perform this exercise will not miss as many QREs when calculating the credit.

• Implementing wage allocation by research role. Taxpayers should categorize employees involved in qualified research as direct researchers, supervisors, or support staff at the project or business component level. This does not require complex software. A simple time-coding system or annual percentage allocation signed off by the employee and/or manager creates a contemporaneous record that should hold up under IRS examination.

• Reviewing the Section 280C election. Section 280C provides taxpayers that claim the research credit an option to reduce their credit in lieu of reducing their Section 174A deduction. The election affects how the research credit and the research deduction interact on the return. Taxpayers need to assess their specific tax situation to determine if they should make the 280C election.

• Starting the conversation now. CPAs should explain the Section G requirements to their R&D credit clients ahead of the 2026 filing season and identify gaps in the client's current documentation. That conversation is more beneficial in mid-2026 than it is in March 2027.