Startups · Section 41
A qualifying startup can use up to $500,000 a year of its R&D tax credit against payroll tax.
The federal research and development (R&D) tax credit, under Section 41, is 20% of your qualified research expenses (QREs) above a base amount. A startup that owes no income tax yet can elect to take it off the employer’s Social Security and Medicare tax instead. It must be a qualified small business: under $5 million of gross receipts this year, and none before the last five tax years.
Updated · Sources
Federal research credit for 2026
- 10%
- of QREs is the regular credit for a startup with little revenue, since its base is half its QREs.
- $500K
- is the most a qualified small business can put against payroll tax each year, in up to five years.
- $5M
- or more of gross receipts in the election year rules a company out. So do any receipts before the five years ending with it.
This tax incentive has been permanent since 2015. The One Big Beautiful Bill Act left these figures alone, and none is indexed for inflation.
Does your work qualify for the R&D tax credit?
Your work must pass the IRS’s four-part test, the first four items below, and stay off the excluded list. Each product, process or piece of software is tested on its own.
Research that removes uncertainty
The work must aim to remove uncertainty about whether you can build the product, how to build it, or which design will work. It does not need to succeed, or to break new ground in your field. The costs of that work must also qualify as US research costs under Section 174A.
Technological in nature
The work must rely on engineering, computer science, or the physical or biological sciences. Research in the social sciences, arts or humanities does not count.
A new or improved business component
The aim must be better function, performance, reliability or quality in a product, process, piece of software, formula or invention. Style and cosmetic design do not count. A manufacturing process is a separate component, with its own tests.
A process of experimentation
At least 80% of the research on the component must test alternatives, by modeling, simulation or systematic trial and error. If a whole product fails the four tests, you apply them to its most significant part, then smaller parts, until one passes.
Not on the excluded list
Work after a product is ready for commercial sale does not count. Adapting a product for one customer, copying one, market research and routine quality testing are excluded too. Software for your own back office counts only if it passes a stricter innovation test.
C corporations, S corporations, partnerships and sole proprietors can all claim the credit. Individual owners of an S corporation or partnership can use a passed-through credit only against their tax on that business’s income. The rest carries over.
A startup with $1 million of QREs and no sales can claim a $100,000 credit.
The credit is calculated on your QREs. They are wages for doing, directly supervising or directly supporting the research, plus supplies, rented computer time and 65% of US contractor fees.
Alternative simplified credit
$60,000
The alternative simplified credit is 14% of QREs above half the average of the three prior years. With no QREs in 2022 or 2023, this startup gets 6% of QREs instead.
Reduced regular credit
$79,000
The reduced credit under Section 280C is 79% of the regular credit. In return, you keep the full research deduction.
Regular credit
$100,000
The regular credit is 20% of the $500,000 of QREs above the base amount.
A new company’s base amount is 3% of its average gross receipts, or half its QREs if that is more. This company had no receipts before 2025, so its base is $500,000. Its only 2025 receipts are $15,000 of bank interest, so it is a qualified small business. It makes the payroll tax election on a return filed March 20, 2026. It pays $240,000 of wages a quarter, and no employee earns more than the Social Security wage base. From April 2026, the employer’s 6.2% Social Security and 1.45% Medicare tax absorb $18,360 of credit a quarter. The last $8,200 is used in the third quarter of 2027. Taking the full credit cuts the 2025 Section 174A deduction by $100,000. For a company with a loss, that only shrinks its net operating loss. State research credits are separate.
From 2025, you can write off US research costs in the year you pay them.
The One Big Beautiful Bill Act added Section 174A, a full R&D deduction for domestic research costs in tax years beginning after 2024. For this deduction, all software development costs count as research costs, even for work that fails the credit’s four-part test.
| 2022 to 2024 | From 2025 | |
|---|---|---|
| US research costs | Amortized over 5 years 10% in the first year | Deducted in the year paid Or over at least 60 months, if you elect |
| Year-one deduction on $1M | $100,000 | $1,000,000 Less the credit, unless the reduced credit is elected |
| Costs left from 2022 to 2024 | Amortized on schedule | Deductible in full on the 2025 return Or split over 2025 and 2026 |
| Research outside the US | Amortized over 15 years | Amortized over 15 years |
You choose how to deduct costs left from 2022 to 2024 on the original return for your first tax year beginning after 2024. For a calendar-year C corporation on extension, that return is due October 15, 2026. Small businesses could also amend 2022 to 2024 returns to deduct those costs, but that option closed on July 6, 2026. Research costs before a business opens are deducted under Section 174A too, not amortized as start-up costs.
What can cost you the R&D credit, or delay it?
Bank interest can start the five-year clock
Gross receipts include interest on the company’s bank balance, however small, so they can start before your first sale. Once a company has gross receipts, it can make the payroll tax election only in that year and the next four. Each of those years also needs receipts under $5 million.
The election must be on the original return
Make the payroll tax election on Form 6765 with a return filed by its due date, including extensions. An amended return cannot make it. The same rule applies to the reduced credit under Section 280C.
Filing later delays the offset
The offset starts in the first calendar quarter that begins after you file the return with the election. If you file a calendar-year return on March 31, the offset starts in April. If you file on April 1, it starts in July.
Contract and foreign research have extra limits
Contractor fees count only if you agreed on the work in advance and pay whether or not it succeeds. You must also have the right to use the results. Research done outside the US and its territories earns no credit, even by your own staff.
Funded research does not count
Research paid for by a grant, a customer or anyone else is excluded, to the extent it is funded. Payment due only if the research succeeds is not funding. If you keep no substantial rights to the results, none of the research counts, even the part you paid for.
Claims need records by project from 2026
Current IRS instructions require Section G of Form 6765 from 2026 returns, listing wages, supplies, computer rental and contract research by business component. A qualified small business making the payroll tax election is exempt. So is an original-return claim with QREs of $1.5 million or less, if average gross receipts are $50 million or less.
One CPA firm handles your startup’s taxes, all year.
Startups hire Valim’s CPAs for their business returns, at a fee fixed before any work starts.
- We prepare the company’s federal and state returns, and a licensed CPA signs each one.
- We can clean up the company’s books during the filing, if they need it.
- We file the company’s federal extension on Form 7004 for free, whether or not we prepare its return.
- We advise founders on 83(b) elections and QSBS, and prepare their personal returns too.
- If the IRS or a state writes about a return we prepared, we reply within your fee.
- Business return
- from $495
We quote a flat fee before work starts. We do not bill hourly.
R&D tax credit questions.
How does the payroll tax offset work?
The payroll tax offset lets a qualified small business use up to $500,000 a year of its R&D credit against payroll tax. A qualified small business has under $5 million of gross receipts for the year, and none before the last five tax years. It elects on Form 6765 with a timely return, then claims the credit on Form 8974 with its Form 941 from the next quarter. Each quarter, the credit reduces the employer’s 6.2% Social Security tax first, then its 1.45% Medicare tax. The credit is not refundable, so any amount left carries to the next quarter.
How much can a startup offset in 2026?
A qualifying startup can offset up to $500,000 of R&D credit for each tax year it elects, in up to five years. In 2026 quarters, a calendar-year startup uses leftovers from earlier elections, plus its 2025 election if that return was filed by September 30, 2026. Each quarter’s offset is capped at the employer’s Social Security and Medicare tax for that quarter. Using $500,000 within four quarters takes about $6.54 million of wages below the Social Security wage base. The Inflation Reduction Act raised the cap to $500,000 for tax years beginning after 2022, and it is not indexed.
Can a startup with no revenue claim it?
Yes, a startup with no revenue can claim the R&D credit, and elect to use it against payroll tax if it has employees. Bank interest counts as gross receipts, though, and can start the five-year window for that election before the first sale. Credit the company cannot use yet carries back one year and forward 20 years. After a change in ownership, Section 383 can limit those carryforwards. Before the business starts, in-house research costs can count if the company plans to use the results in its own business.
What is Form 6765 used for?
Form 6765 is the IRS form for figuring and claiming the federal R&D tax credit, filed with your income tax return. There is no separate application. You also use it to elect the Section 280C reduced credit, the alternative simplified credit and the payroll tax offset. The IRS’s current instructions require its Section G from 2026 returns, listing QREs by business component, with exemptions for smaller claims. A C corporation attaches it to its Form 1120.
What is the 80% rule for R&D credit?
The 80% rule says that substantially all of the research on a business component must be a process of experimentation. Substantially all means 80% or more of the research activities, measured by cost or another consistent method. A second 80% rule covers wages. If 80% or more of an employee’s time goes to doing, directly supervising or directly supporting qualified research, all their wages count as QREs.
Sources
- 26 U.S.C. § 41, Credit for increasing research activities
- 26 U.S.C. § 174A, Domestic research or experimental expenditures
- 26 U.S.C. § 280C, Certain expenses for which credits are allowable
- 26 U.S.C. § 3111, Rate of tax (employer payroll taxes)
- 26 U.S.C. § 39, Carryback and carryforward of unused credits
- 26 U.S.C. § 383, Special limitations on certain excess credits
- 26 U.S.C. § 195, Start-up expenditures
- 26 C.F.R. § 1.41-2, Qualified research expenses
- 26 C.F.R. § 1.41-3, Base amount
- 26 C.F.R. § 1.41-4, Qualified research
- 26 C.F.R. § 1.41-4A, Qualified research for earlier years (funded research)
- 26 C.F.R. § 1.41-9, Alternative simplified credit
- IRS, Instructions for Form 6765 (Rev. December 2025)
- IRS, Instructions for Form 8974 (Rev. December 2024)
- IRS, Notice 2017-23 (qualified small business payroll tax election)
- Public Law 119-21 (One Big Beautiful Bill Act), § 70302
- IRS, Rev. Proc. 2025-28 (Section 174A guidance)
Reviewed and updated September 2026. General information, not advice for your situation.