# The R&D credit on the books

> 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.

Source: https://lopifi.com/learn/accounting-for-the-rd-tax-credit
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How 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.

On the books, research is an [Expense](https://lopifi.com/md/glossary/expense) when it's incurred. That's GAAP's rule, and the tax return's §174A is a separate one. Northwind's hypothetical 2027 payroll for StockMatch runs through payroll expense like any other wages.

> “All research and development costs encompassed by this Statement shall be charged to expense when incurred.”

© Financial Accounting Foundation. All rights reserved.

— [FASB Statement No. 2, ¶12](https://storage.fasb.org/fas2.pdf) (PDF), Research and development costs are expensed on the books

— [ASC 730](https://asc.fasb.org/730/tableOfContent), Research and Development

The credit is harder, because it can land in two places. Used against income tax, it's an income tax benefit under ASC 740: it reduces current [income tax expense](https://lopifi.com/md/glossary/income-tax-expense), or, carried forward, it's a [deferred tax asset](https://lopifi.com/md/glossary/deferred-tax-asset) judged for a [valuation allowance](https://lopifi.com/md/glossary/valuation-allowance). A startup with a full valuation allowance shows nothing on its income statement for a carried-forward credit.

— [ASC 740](https://asc.fasb.org/740/tableOfContent), Income Taxes

Used against payroll tax, it offsets a tax that isn't on income, and GAAP doesn't say where that goes.

> “ASC 740 does not specifically address the accounting for income tax credits that are also available, by election, to offset payroll tax (i.e., dual purpose tax credits).”

— [BDO, Financial Reporting Treatment Under ASC 740 and ASC 450 of Tax Provisions in the PATH Act (January 2020)](https://www.bdo.com/insights/tax/financial-reporting-treatment-under-asc-740-and-asc-450-of-tax-provisions-in-the-path-act), One firm's reading of the payroll offset under ASC 740 — written before the cap rose to $500,000

**Reduce payroll tax expense**
- Pro: The benefit sits next to the cost it offsets
- Pro: Matches how Form 941 and Form 8974 report it
- Con: Payroll tax expense is shown net, so it no longer equals the rates times wages
- Best for: Most startups using the payroll election: the simplest to explain

**Other income**
- Pro: Payroll tax expense ties to the register
- Con: A line in other income to explain
- Best for: Companies that want payroll tax shown gross

**Income tax benefit**
- Pro: One place for the whole credit
- Con: A benefit used against payroll reported in income tax
- Con: Harder to read beside a valuation allowance
- Best for: Companies that treat the whole credit as an income tax item

Three presentations of the payroll credit. Pick one, apply it every quarter, and disclose it.

Here is the first presentation, for Q2 2028. The quarter's employer taxes are accrued as usual; then the credit Form 8974 applies clears the liability instead of cash.

*[Figure: double entry]*

The second entry on the scale: the $8,415 of credit applied in Q2 2028.

In Q4 2028 there's nothing left, and payroll tax expense is back to the rates times the wages.

> **A book-tax difference.** The payroll credit doesn't reduce the payroll tax deduction on the income tax return: §3111(f)(4) says so. A company that books the credit against payroll tax expense has a difference between book and tax to track in its provision.

> **When the credit might not hold.** Uncertainty about an income tax credit is measured under ASC 740's rules for uncertain tax positions. For a credit used against payroll tax, those rules don't apply, and BDO's reading is that the loss-contingency guidance in ASC 450 does.

> **The research is an expense either way. The credit is an income tax item against income tax, and a policy choice against payroll tax: choose it, write it down and disclose it.**

## Where this lesson's rules come from

- [FASB Statement No. 2, ¶12](https://storage.fasb.org/fas2.pdf) (PDF) — Research and development costs are expensed on the books (standard)
- [ASC 730](https://asc.fasb.org/730/tableOfContent) — Research and Development (codification)
- [ASC 740](https://asc.fasb.org/740/tableOfContent) — Income Taxes (codification)
- [BDO, Financial Reporting Treatment Under ASC 740 and ASC 450 of Tax Provisions in the PATH Act (January 2020)](https://www.bdo.com/insights/tax/financial-reporting-treatment-under-asc-740-and-asc-450-of-tax-provisions-in-the-path-act) — One firm's reading of the payroll offset under ASC 740 — written before the cap rose to $500,000 (reference)
- [IRC §3111(f)(3)](https://www.law.cornell.edu/uscode/text/26/3111) — The credit against the employer's Social Security and Medicare tax (statute)

## Read further

- https://lopifi.com/md/journal-entries/rd-payroll-tax-credit
- https://lopifi.com/md/journal-entries/payroll
- https://lopifi.com/md/journal-entries/income-tax-provision
- https://lopifi.com/md/startups/payroll-journal-entries
- https://lopifi.com/md/startups/us-gaap-for-startups
- https://lopifi.com/md/accounting/asc-740
- https://lopifi.com/md/accounting/rd-tax-credit
- https://lopifi.com/md/docs/domain/13-us-gaap

- **Track:** [R&D tax credit](https://lopifi.com/md/learn/rd-credit)
- **Lesson:** Lesson 9 of 9 — 10 min
- **Terms taught:** [Expense](https://lopifi.com/md/glossary/expense), [Income tax expense](https://lopifi.com/md/glossary/income-tax-expense), [Deferred tax asset](https://lopifi.com/md/glossary/deferred-tax-asset), [Valuation allowance](https://lopifi.com/md/glossary/valuation-allowance), [Payroll liabilities](https://lopifi.com/md/glossary/payroll-liabilities)
- **Previous:** [Records, amended claims and state credits, R&D credit · Lesson 8](https://lopifi.com/md/learn/rd-credit-documentation-and-refund-claims)
- **The course:** https://lopifi.com/md/learn