R&D Tax Credits

Can small businesses claim the R&D tax credit?

Yes. Small businesses can claim the R&D tax credit and may be able to apply it against payroll taxes if they meet eligibility requirements. This allows early-stage companies to benefit even if they do not yet have taxable income.

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Expanded Answer

Is the R&D tax credit available to small companies, even if not yet profitable?

The R&D tax credit is available to businesses of all sizes, including startups and small companies. Qualified small businesses (QSBs) may elect to apply up to $500,000 of their credit against payroll tax liabilities, providing a direct financial benefit even in the absence of income tax liability.

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Eligibility depends on meeting gross receipts thresholds and having qualified research expenses under Section 41. This makes the credit particularly valuable for early-stage companies investing heavily in product development and technical innovation. Source: https://www.irs.gov/businesses/research-credit

What Qualifies

Activities that commonly qualify

Developing new software features or platform capabilities

Improving performance, scalability, reliability, or security

Building internal tools or technical workflows that required experimentation

Testing different technical approaches to solve engineering challenges

What Does Not Qualify

Work that usually does not qualify

Routine bug fixes with no technical uncertainty

Visual-only updates or minor design changes

Marketing, sales, and customer support work

General maintenance that did not require experimentation

Work already solved through an off-the-shelf implementation

Example Case Study

Example of a small business using the R&D tax credit

A startup with a small engineering team invests heavily in building its core product but has not yet generated significant revenue. Despite having no income tax liability, the company qualifies for the R&D tax credit based on its development activities.

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By electing the payroll tax offset, the company applies the credit against payroll taxes, improving short-term cash flow and supporting continued investment in product development.

Quick takeaway

If your team had to work through technical uncertainty, there is a good chance the work deserves a closer look.

Common Industry Examples

Determining qualified small business eligibility under IRS gross receipts thresholds

Electing and applying the payroll tax offset for eligible credits

Tracking development-related expenses across small teams and projects

Allocating wages and contractor costs to qualified research activities

Filing Form 6765 with the appropriate payroll tax election and supporting documentation

Curious if you are missing out on credits?

Start with a quick eligibility check. If it looks promising, we move to a light info request and one technical interview.

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