Key figures
Federal advisory
2026, with sources
- R&D credit payroll offset (qualified small business)
- Up to $500,000 a yearAnnual election on Form 6765; applied first to the employer’s Social Security tax, up to $250,000 a quarter, then Medicare.
- Qualified small business for the payroll offset
- Gross receipts under $5 millionAlso no gross receipts in any year before the 5-tax-year period ending with the current year.
- QSBS exclusion, stock issued after July 4, 2025
- 50% / 75% / 100%Held 3 years: 50%; 4 years: 75%; 5 years or more: 100%.
- QSBS per-issuer gain cap, stock issued after July 4, 2025
- $15,000,000$10,000,000 for stock issued on or before July 4, 2025; indexed for inflation after 2026.
- QSBS gross-asset test
- $75 million or less$50 million for stock issued on or before July 4, 2025; measured before and immediately after issuance.
The R&D tax credit and the payroll offset
The federal R&D tax credit (IRC Section 41) is claimed on Form 6765. Most early startups have no income tax to offset, so Congress lets a qualified small business — gross receipts under $5 million for the year and none before the five-year period ending with it — elect to apply up to $500,000 of the credit each year against payroll tax instead. The cap was raised from $250,000 for tax years beginning after December 31, 2022.
The election is made on a timely filed income tax return, including extensions. The credit then flows to Form 8974 attached to Form 941, starting with the first quarter that begins after the income tax return is filed, and reduces the employer’s share of Social Security tax (up to $250,000 a quarter) and then Medicare tax.
QSBS, Section 1202, and why entity choice matters
Qualified small business stock lets a non-corporate holder exclude gain on stock of a domestic C corporation that passes Section 1202’s tests. Public Law 119-21 changed it for stock issued after July 4, 2025: a tiered exclusion of 50% after three years, 75% after four and 100% after five; a per-issuer cap of $15 million (indexed after 2026); and a gross-asset ceiling of $75 million, up from $50 million. Stock issued on or before that date keeps the prior rules.
QSBS is one reason most venture-backed startups are Delaware C corporations rather than LLCs. An LLC taxed as a partnership passes income and losses through to members and avoids the corporate level of tax, but its units are not QSBS, it complicates employee equity, and most institutional investors will not hold it. Converting later is possible; the holding period for QSBS starts at conversion.
Equity: 83(b), 409A and SAFEs
Founders receiving restricted stock that vests can file an 83(b) election within 30 days of the grant to be taxed on its value now — usually close to nothing — rather than as it vests. Employee options are priced at fair market value to stay outside Section 409A; a valuation by a qualified independent appraiser, as of a date no more than 12 months before the grant, is presumed reasonable under the regulations, which is why companies refresh their 409A valuation at least annually and after a priced round.
SAFEs and convertible notes are a book question and a tax question. For books, a SAFE is often classified as a liability under US GAAP and remeasured; a convertible note is debt with interest accruing. For tax, the IRS has not issued guidance specific to SAFEs, so treatment follows the instrument’s terms and your preparer’s position.
Reimbursements and the accountable plan
When the company reimburses an employee for business expenses under an accountable plan — a business connection, substantiation, and excess advances returned within a reasonable time — the reimbursement is not wages and does not go through payroll. Without one, the same payments are taxable compensation.
Mileage can be reimbursed at the IRS standard mileage rate instead of actual costs. For 2026 the business rate was 72.5 cents a mile through June 30 and 76 cents from July 1, after the IRS raised it mid-year.
Advisory, state by state
Everything above applies everywhere. Each state then adds its own rules. Choose one to read its advisory page.
Common questions
Can a pre-profit startup use the R&D tax credit?
Possibly, if you have qualified research and are a qualified small business — gross receipts under $5 million and no receipts before the five-year window. The election is made on Form 6765 with a timely filed income tax return, and the credit then reduces the employer’s Social Security tax (then Medicare) on Form 941, starting the quarter after the return is filed, up to $500,000 a year.
How does QSBS work now?
For stock issued after July 4, 2025, Section 1202 excludes 50% of qualifying gain after three years, 75% after four and 100% after five, subject to a per-issuer cap of $15 million. The company must be a domestic C corporation with gross assets of $75 million or less when the stock is issued, among other tests. Stock issued on or before July 4, 2025 keeps the old rules: five years, $10 million, $50 million.
Do I need a CPA or a fractional CFO?
A CPA prepares and signs returns, handles notices and elections, and can audit or review statements if they are independent. A fractional CFO runs the forward-looking work — budget, runway, fundraising models, board reporting. Most seed-stage companies need the first every year and the second once there is a board and a plan to report against.
Founder guides on this
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- EquityStock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- SAFEsHow to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
- RunwayBurn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
- FundraisingAudit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.
More of the federal guide
- AccountingFederal accounting for startupsCorporate tax, conformity to federal rules, apportionment and what it does to your books
- ReceivablesFederal receivables for startupsSales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesFederal payables for startupsPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollFederal payroll for startupsWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceFederal compliance for startupsRegistering to do business, annual reports, franchise tax and the filing calendar
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.