What the R&D tax credit is, and who can use it

The R&D tax creditResearch creditResearch 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 is the federal credit for increasing research activities, IRC §41. It pays a company back part of what it spends on qualified researchResearch creditQualified 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: mostly the wages of the people doing it. A credit cuts tax dollar for dollar. A deduction only lowers the income the tax is figured on, so at the 21% corporate rate a dollar of credit is worth about 5 dollars of deduction.

The catch for a startup is that it usually owes no income tax. It loses money, so it has a net operating lossTaxNet 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 and nothing for an income tax credit to cut. That leaves three places the credit can go.

Lesson by lesson, the track works that year through: which work qualifiesR&D tax credit · Lesson 2 of 9The 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?Four tests, applied to each business component separately, worked on one hypothetical piece of software.10 min · 1 page, which costs countR&D tax credit · Lesson 3 of 9Qualified research expenses: wages, supplies and contractorsWhat counts as qualified research expenses for the R&D credit?Wages for qualified services, supplies, rented computers and 65% of contract research, worked line by line for one hypothetical year.12 min ($251,700 of them), how the credit is computedR&D tax credit · Lesson 4 of 9Computing the credit: the ASC and the regular methodHow do you calculate the R&D tax credit? ASC versus the regular creditThe alternative simplified credit line by line, the 6% rule for a company's first years, and when the regular credit is the better method.10 min ($15,102), how it comes back through payrollR&D tax credit · Lesson 5 of 9Taking the credit against payroll taxHow do I use the R&D tax credit against payroll taxes?Who qualifies, how the election is made on Form 6765, and how Form 8974 applies the credit quarter by quarter, worked for one hypothetical year.12 min · 1 page in 2 quarters, what Form 6765 asks forR&D tax credit · Lesson 6 of 9Form 6765, section by sectionHow do I fill out Form 6765, and when is Section G required?Form 6765 section by section, the order to fill it in, and the hypothetical year's entries line by line.8 min · 1 page, how Section 174A treats the same costsR&D tax credit · Lesson 7 of 9Section 174A and foreign researchHow do Section 174 and 174A work with the R&D tax credit?When research costs are deducted, US and abroad, before and after the 2025 law, worked for one hypothetical year.11 min · 1 page, the records it stands onR&D tax credit · Lesson 8 of 9Records, amended claims and state creditsWhat documentation do I need for the R&D tax credit, and can I claim a past year?The records a credit stands on, what an amended-return claim must contain, which elections it can't make, and where state credits come in.9 min and how it sits on the booksR&D tax credit · Lesson 9 of 9The R&D credit on the booksHow do you account for the R&D tax credit and the payroll tax offset?Research is expensed on the books; the credit is an income tax item against income tax and a disclosed policy choice against payroll tax, with the entries.10 min.