R&D tax credit
The research credit, what qualifies, the payroll tax election, Section 174 and Form 6765.
9 lessons4 nested pages112 min1 exerciseFree
Does my startup qualify for the R&D tax credit, and how do we claim it? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 9 lessons
- What the R&D tax credit is, and who can use itWhat is the R&D tax credit, and can a startup actually use it?
- The four-part test: what counts as qualified researchDoes my startup's work qualify for the R&D tax credit? What is the four-part test?
- Qualified research expenses: wages, supplies and contractorsWhat counts as qualified research expenses for the R&D credit?
- Computing the credit: the ASC and the regular methodHow do you calculate the R&D tax credit? ASC versus the regular credit
- Taking the credit against payroll taxHow do I use the R&D tax credit against payroll taxes?
- Form 6765, section by sectionHow do I fill out Form 6765, and when is Section G required?
- Section 174A and foreign researchHow do Section 174 and 174A work with the R&D tax credit?
- Records, amended claims and state creditsWhat documentation do I need for the R&D tax credit, and can I claim a past year?
- The R&D credit on the booksHow do you account for the R&D tax credit and the payroll tax offset?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Research creditA federal general business credit for qualified research expenses — computed on Form 6765 by the regular method or the alternative simplified credit, used against income tax, carried back one year and forward twenty when unused, or, for a qualified small business, elected against payroll tax
- Qualified researchResearch whose costs are §174A domestic research expenditures, undertaken to discover information that is technological in nature, intended to be useful in developing a new or improved business component, where substantially all (80% or more) of the activities form a process of experimentation for a functional purpose — applied to each business component separately, and excluding research after commercial production, adaptation, duplication, surveys, most internal-use software, foreign research, social sciences and funded research
- Business componentThe unit qualified research is tested and reported in: a product, process, computer software, technique, formula or invention held for sale, lease or license or used in the taxpayer's own business — listed one by one in Form 6765, Section G
- Net operating lossThe excess of tax deductions over gross income for a year. Federal NOLs arising after 2017 carry forward indefinitely, cannot be carried back (farming aside), and may offset only 80% of taxable income computed before the NOL deduction
- Payroll tax offsetAn election by a qualified small business — gross receipts under $5 million and none before the last five years — to apply up to $500,000 a year of its research credit against the employer share of Social Security and then Medicare tax. Elected on Form 6765 with a timely original return, claimed on Form 8974 from the next quarter
- Process of experimentationEvaluating one or more alternatives to achieve a result whose capability, method or appropriate design is uncertain at the start, by modeling, simulation or systematic trial and error grounded in the physical or biological sciences, engineering or computer science
- Internal-use softwareSoftware developed primarily for the taxpayer's own general and administrative functions — financial management, human resources, support services. Its development qualifies for the research credit only if it also meets the high-threshold-of-innovation test: innovative, significant economic risk, and not commercially available
- Qualified research expensesWhat the credit is computed on: wages for qualified services — doing, directly supervising or directly supporting qualified research (all of a person's wages once that is 80% or more of them) — plus supplies used in the research, rented off-site computers, and 65% of contract research paid to others
- Contract research expenses65% of amounts paid to a non-employee for qualified research performed on the taxpayer's behalf under an agreement made before the work, where the taxpayer bears the cost even if the research fails; 75% for a qualified research consortium
- Alternative simplified creditThe research credit computed as 14% of QREs above 50% of the average QREs of the three prior years, or 6% of current QREs if any one of those years had none; elected on a timely filed original return (or an amended one only if no credit was claimed for that year) and binding for later years unless revoked
- Regular research creditThe research credit computed as 20% of QREs above a base amount — a fixed-base percentage (3% for a start-up's first five years with QREs, never more than 16%) times average gross receipts of the four prior years, and never less than 50% of current QREs
- Form 6765The IRS form that figures the research credit, makes the §280C reduced credit election (Item A), the ASC election (Section B) and the qualified small business payroll election (Section D), and reports QREs (Section F) and business components (Section G, required for tax years beginning after 2025 with exceptions)
- Form 8974The form attached to each quarterly Form 941 to apply an elected research payroll credit — first against the employer's Social Security tax, up to $250,000 a quarter, then the employer's Medicare tax — carrying what the quarter cannot absorb to the next
- Payroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxesConvention
- Refundable creditA tax credit whose excess over the tax due is paid out in cash. Because it does not depend on taxable income, it is generally accounted for outside ASC 740 — as a reduction of the related cost or as other incomeConvention
- Reduced credit electionAn election on the original timely filed return to take the research credit reduced by the 21% corporate rate (79% of it) instead of cutting the §174A research deduction by the full credit; irrevocable for the year
- Section 174AThe OBBBA rule restoring immediate deduction of domestic research or experimental expenditures for tax years beginning after 2024, with an election to amortize over 60 months or more instead. Foreign research stays capitalized over 15 years under §174; small businesses could apply it back to 2022–2024
- AmortizationSpreading the cost of a finite-lived intangible, a prepaid or a debt discount over the periods it serves
- CapitalizationRecording a cost as an asset rather than an expense because it brings a future benefit — then allocated to expense over that benefit
- IRC conformityHow a state's income tax adopts the federal Internal Revenue Code — rolling (as currently amended), fixed-date (as of a stated date, updated by legislation) or selective. A fixed-date state may not follow §174A, bonus depreciation or other recent federal changesConvention
- EvidenceDocumentation supporting a recorded amount
- ExpenseOutflows or other using up of assets, or incurrences of liabilities, from delivering or producing goods, rendering services or carrying out other activities — recognized when incurred, not when paid
- Income tax expenseThe P&L charge for income taxes — current tax payable for the period plus the change in deferred tax assets and liabilities
- Deferred tax assetFuture tax savings from deductible temporary differences and carryforwards, measured at enacted rates
- Valuation allowanceThe reduction of a deferred tax asset to the amount more likely than not (over 50%) to be realized