R&D tax credit for startups
The R&D credit,
claimed and documented.
Most software teams do qualifying research every sprint. The federal research credit under §41 pays for part of it, and a young company can apply it against payroll taxes before it has income tax to offset. We find the qualifying work with your engineering leads, quantify it from payroll and vendor records, and file it with the detail the IRS now asks for.
What the study and filing include
- Qualifying projects identified against the four-part test, one business component at a time
- Qualified research expenses from wages, supplies, cloud computing used in research, and 65% of US contract research
- The credit computed under the alternative simplified method or the regular method
- Form 6765, including the business-component detail the IRS now requests
- The payroll tax election for qualified small businesses, up to $500,000 a year, coordinated with your payroll provider
- §280C coordination between the credit and the research deduction
- State research credits where your states offer one
- A documentation file built from sprint records, so the claim holds up on review
The payroll tax election has to be made on a timely filed original return. It can't be added by amendment, so we decide it before the return goes out.
§174 and §174A after the 2025 law change
For tax years beginning after 2021, software development costs had to be capitalized and amortized over five years. Legislation enacted in July 2025 added §174A, restoring a current deduction for domestic research for tax years beginning after 2024. Foreign research is still amortized over 15 years.
- Current deduction or capitalization going forward, modeled against projected taxable income
- Unamortized 2022 to 2024 costs accelerated under the IRS procedures where it helps
- The small-business retroactive election and amended returns, where the company qualifies
- State conformity checked, since not every state follows the federal treatment
The procedures and deadlines are in Rev. Proc. 2025-28. We check each year against them and the statute of limitations before recommending an amendment.
Questions founders ask
Can a pre-profit startup use the R&D credit?
Yes. A qualified small business can elect to apply up to $500,000 of the credit each year against the employer share of payroll taxes, so the credit turns into cash before there is income tax to offset. The company has to be under the gross receipts limit for the year and within its first five years of gross receipts.
What counts as qualified research for a software company?
Work that relies on computer science or engineering, aims at a new or improved function, performance or reliability, and resolves technical uncertainty through a process of experimentation. Routine bug fixes, cosmetic changes and work after commercial release generally do not qualify.
Is §174 still a problem for software companies?
Less than it was. For tax years beginning after 2024, domestic research and development costs can be deducted again under §174A. Costs from 2022 to 2024 and any foreign research still need decisions, so we model them together with the credit.
What records do we need?
Payroll by person, time or sprint records that show who worked on which projects, contractor agreements and invoices, cloud bills for development and testing environments, and tickets or design documents that show the technical uncertainty and how it was resolved.
From the library
- The R&D Tax Credit for SaaS Companies (IRC §41)
- Section 174 and 174A After 2025: Deducting Software Development Again
- Form 1120 for Venture-Backed C Corporations
- Corporate Estimated Tax Payments for SaaS Companies
More for SaaS and AI founders
- Fractional CFO: Forecast, burn and runway, board and investor reporting, unit economics and funding readiness.
- SaaS bookkeeping: GAAP books on accrual, automated reconciliations, deferred revenue right, closed every month.
- Tax preparation: Federal and state returns, Delaware franchise tax, the R&D credit and sales tax nexus.
- Startup accounting: The accounting a venture-backed startup needs at each stage, and a monthly close that keeps it diligence-ready.
- Accounting for AI companies: Inference and compute in COGS, cloud and GPU credits tracked, usage- and credit-based pricing under ASC 606, and the R&D credit on model work.