What is the R&D Tax Credit?
The Research and Development (R&D) Tax Credit under IRC Section 41 allows businesses to claim a credit for qualified research expenses. Since the PATH Act of 2015, startups can apply up to $250,000 of this credit against payroll taxes — even before they are profitable.
What Qualifies?
You don't need a lab to claim R&D credits. Most software and tech companies qualify. The IRS uses a four-part test:
- Permitted Purpose: Developing a new or improved product, process, or software
- Technical Uncertainty: You're solving a technical problem with an uncertain outcome
- Process of Experimentation: You test, iterate, and evaluate alternatives
- Technological in Nature: The work relies on engineering, science, or computer science
How Much Can You Claim?
Qualifying startups can offset up to $500,000 in payroll taxes per year ($250,000 for Social Security, $250,000 for Medicare). This is a dollar-for-dollar reduction in your tax bill — not just a deduction.
Common Qualifying Activities
- Writing and testing software code
- Developing new algorithms or data models
- Designing and prototyping new products
- Cloud architecture and infrastructure development
FinStackk identifies qualifying R&D activities during your annual tax review and files Form 6765 on your behalf to maximise your credit.