Are R&D Tax Credits Available for Small Businesses?


small business

Deborah Roth, CPA
May 10, 2023

R&D tax credits are available for small businesses. Also known as the Research & Development tax credit, small businesses could potentially offset up to $500,000 in payroll tax liability for qualifying activities (even those companies that are not yet profitable). Expenses that can be potentially offset with this federal tax credit include employee wages, paying contractors, purchasing supplies, and many other costs. If you have a small business that performs research and/or technology development activities, you can claim an R&D tax credit. The R&D tax credit can then be applied to offset payroll tax or income tax.

Benefits of the R&D Tax Credit

Claiming the R&D tax credit enables small businesses to

  • Increase cash flow and significant savings
  • Reduce the Federal tax rate
  • Receive Federal and State dollar-for-dollar income tax reduction
  • Ability to claim the credit for open tax years going back 3 to 4 years

What are the Qualifications for Small Businesses To Claim the R&D Tax Credit?

In order to apply for the R&D tax credit, your small business must meet the below criteria:

  • Have 5 years or less in revenue
  • Have less than $5 million in revenue in the current year
  • Have conducted qualifying research activities and expenditures
  • Additionally, if your small business paid for any of the below, it might also qualify for the tax credit
  • Employees or sub-consultants performing research
  • Raw materials
  • Consumable supplies during development
  • Cloud computing services related to development operations

Claiming R&D Tax Credits for Small Businesses

The following are examples of qualified research activities for small businesses to claim under the R&D tax credit:

  • Design and development of new or improved software applications
  • Development of conceptual designs and defining requirements and specifications for new or improved products
  • Development of tooling, fixtures, and dies
  • Building and testing prototypes
  • Development of production processes and equipment
  • Evaluation and testing of new materials for product development

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Common Challenges When Claiming R&D Tax Credits

Although claiming this credit can offer considerable benefits for companies engaged in R&D efforts, the process can be challenging.

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Running a startup is all about innovation and making the most of your resources. But what if you're not yet turning a profit?

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What Happens to Unused R&D Tax Credits?

What happens if you don’t use all your credits in a single year? Don’t worry! The US tax code has you covered.

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