R&D Tax Credits for Startups and Small Businesses

Last Updated on 08/05/2026

By Jonathan Tucker | Principal, R&D  

Startups and small businesses that invest in Research and Development (R&D), product development, software, engineering, or certain manufacturing activities may be eligible for the federal R&D tax credit. The R&D credit can help reduce tax liability and, for eligible qualified small businesses, may also provide payroll tax offset opportunities. 

To claim the credit, businesses generally need to complete IRS Form 6765, Credit for Increasing Research Activities, and maintain documentation supporting their qualified research expenses. 

Key Takeaways

  • Businesses generally use Form 6765 to calculate and claim the federal R&D tax credit under Section 41. 
  • Eligible businesses may calculate the credit under the regular credit method or the Alternative Simplified Credit method. 
  • Qualified small businesses may be able to apply up to $500,000 of the credit annually against payroll taxes. . 
  • KBKG’s R&D tax credit specialists have helped thousands of companies evaluate qualifying activities, compute available credit methods, assess payroll-tax election opportunities, and prepare the technical and financial documentation needed to support their claims. 

What Is Form 6765?

Form 6765 (Credit for Increasing Research Activities) is the official IRS form that businesses use to calculate and claim the federal R&D tax credit under Internal Revenue Code Section 41. 

The purpose of the R&D tax credit is to encourage companies to innovate and invest in research activities that improve products, processes, software, techniques, formulas, or other business components. 

How to Fill Out Form 6765

Form 6765 is typically filed as part of a company’s annual income tax return package. It may also connect with other forms, including Form 3800 for general business credits and Form 8974 for qualified small businesses making a payroll tax credit election. 

Businesses should carefully complete the sections that apply to their credit calculation method, entity type, and payroll tax election status. The form includes sections for the regular credit method, the Alternative Simplified Credit, reporting credit allocations, and claiming the payroll tax offset. 

  • Section A: Used to claim the regular R&D tax credit. 
  • Section B: Used for the Alternative Simplified Credit method. 
  • Section C: Used to report additional forms and schedules based on business structure. 
  • Section D: Used when a qualified small business makes a payroll tax election. 

Eligible businesses may want to calculate the credit under both available methods to determine which approach provides the greater benefit, but only one method may be claimed on the tax form, and once elected is irrevocable for that tax year. It is important to ensure proper documentation is retained to support whichever credit method is claimed. 

KBKG’s R&D experts recommend comparing the regular credit method and the Alternative Simplified Credit rather than assuming one calculation will always provide the greater benefit. Our proprietary dual-method credit analysis considers the company’s research history, current qualified research expenses, available documentation, and applicable election requirements to identify the method that is both supportable and most beneficial. 

For specific questions, or to see how much your company can save, you can contact our R&D experts for a free consultation. 

The Payroll Tax Offset for Start-Ups

The R&D tax credit may allow eligible startups and qualified small businesses to offset a portion of their payroll taxes. This can be especially valuable for newer companies that are not yet profitable but are still investing in research and development. 

Generally, an eligible business must have less than $5 million in gross receipts for the current tax year and no gross receipts for any tax year before the five-tax-year period ending with the current tax year. This election can only be made on orignal timely filed tax returns, including extentions. For qualifying companies, the payroll tax offset can create immediate cash-flow benefits that may be reinvested into hiring, product development, software improvements, or other growth initiatives. 

The Impact of the R&D Tax Credit on Payroll Taxes

The payroll tax offset allows qualifying businesses to benefit from the R&D credit even when they do not have income tax liability. By reducing payroll tax obligations, startups can preserve capital and redirect resources toward innovation, staffing, and continued development. 

For small businesses focused on technical development, this feature can make the R&D tax credit a practical funding tool rather than a benefit that only applies once the company becomes profitable. 

KBKG’s startup payroll-tax review considers more than the potential size of the credit. The analysis evaluates gross-receipts history, election timing, and the coordination of Form 6765, Form 8974, and the company’s payroll filings so the business can determine whether it qualifies, how much credit may be elected, and when the benefit can first be applied. 

How Does Form 6765 Tie to the R&D Tax Credit?

Businesses must generally complete Form 6765 to claim the business research credit. Qualified expenses may include certain wages, contract research costs, supplies, and cloud hosting expenses tied to qualifying research activities. 

Companies may want to evaluate the R&D credit if they perform activities such as: 

  • Developing intellectual property 
  • Creating or improving products, processes, techniques, formulas, software, or prototypes 
  • Paying employees or contractors to perform technical development work 
  • Designing or improving existing products or software 
  • Committing time and resources to innovation or manufacturing improvements 
  • Hiring engineers, scientists, designers, developers, or other technical employees 

Businesses should compile payroll records, invoices, technical documentation, project notes, and other support before preparing the credit claim.

How To File Form 6765

Companies may complete Form 6765 themselves, use tax software, or work with a tax professional. Because R&D credit claims require both tax and technical support, businesses should be careful to avoid errors that could reduce or jeopardize the credit. 

A qualified tax professional can help identify eligible expenses, choose the appropriate calculation method, prepare the necessary forms, and document the claim in case of IRS review. 

What About Section 174?

Section 174 governs the treatment of research and experimental expenditures. The Tax Cuts and Jobs Act changed how businesses handle these expenses for tax years beginning after December 31, 2021, and the One Big Beautiful Bill Act (“OBBBA”) changed this again for tax years beginning after December 31, 2024. Between 2022 and 2024, certain domestic R&D costs generally must be capitalized and amortized over five years rather than immediately deducted, and certain foreign R&D costs generally must be amortized over 15 years. 

These rules impacted many businesses, including software companies, because software development expenses fall under Section 174. However, the OBBBA restored immediate expensing for domestic R&D costs for tax years beginning after December 31, 2024, but certain foreign R&D costs remain amortized over 15 years. Businesses claiming the R&D tax credit should consider how Section 174 expense treatment interacts with their qualified research expense. The OBBBA also provides businesses with options on what to do with remaining unamortized domestic R&D costs from the 2022-2024 time period.  

For additional background, businesses may review the Joint Committee on Taxation and Congressional Research Service materials on the research credit and Public Law 115-97. 

How Do Section 174 and Section 41 Interact?

Internal Revenue Code Section 41 provides the federal research credit for qualified research activities. To qualify, research activities generally must satisfy the four-part test: 

  • Permitted purpose: The work must relate to developing or improving functionality, performance, reliability, or quality. 
  • Technological in nature: The activity must rely on principles of hard science, such as engineering, computer science, biology, chemistry, physics, or similar fields. 
  • Elimination of uncertainty: The taxpayer must face uncertainty about the capability, method, or design of the intended result. 
  • Process of experimentation: The business must evaluate alternatives through modeling, testing, simulation, trial and error, or another systematic technical process. 

While Section 174 and Section 41 both relate to research activity, they are not identical. Section 174 may cover a broader range of research and experimental expenditures, while Section 41 focuses on costs connected to qualified research activities that meet the statutory credit requirements. 

Certain activities are generally excluded from the R&D credit, including: 

  • Market research, surveys, advertising, or management studies 
  • Duplication or adaptation of an existing business component 
  • Research conducted outside the United States 
  • Research in the arts, humanities, or social sciences 
  • Funded research where the taxpayer does not retain substantial rights or bear economic risk 

KBKG’s R&D Expense-to-Credit Reconciliation Framework evaluates Section 174 research-expense treatment and Section 41 credit eligibility side by side. Businesses should not assume that every research expenditure qualifies for the credit, or that every qualified research expense receives identical deduction treatment, because the provisions have overlapping but distinct definitions, calculations, and documentation requirements. 

Conclusion

For startups and small businesses, the R&D tax credit can turn qualified development spending into an income tax benefit or, for eligible qualified small businesses, a payroll tax offset. The potential value depends on the company’s activities, qualified research expenses, calculation method, and supporting documentation. KBKG’s R&D tax credit experts help businesses evaluate eligibility, compare available calculation methods, coordinate payroll tax elections, and prepare supportable claims. Businesses that want to understand how much their qualifying work may generate can request a free, no-obligation consultation with KBKG’s R&D tax credit team. 

Frequently Asked Questions

Do startups qualify for the R&D tax credit?

Yes. Startups may qualify when their activities satisfy the Section 41 requirements and they incur qualified research expenses, even if they do not yet have income tax liability. A startup seeking the payroll tax offset generally must have less than $5 million in gross receipts for the credit year and no gross receipts before the five-tax-year period ending with that year.  

There is no fixed credit amount or percentage for every business. The result depends on qualified research expenses, prior-year research spending, gross receipts, the selected calculation method, and applicable elections. Under the Alternative Simplified Credit method, the credit is generally 14% of current-year qualified research expenses above 50% of the average qualified research expenses from the prior three years. KBKG’s R&D specialists recommend comparing the available methods to identify the calculation that is both supportable and most beneficial.  

Yes. An eligible qualified small business may elect to apply up to $500,000 per year of its R&D tax credit against employer payroll tax liability. The election is made on a timely filed original income tax return using Form 6765, and the elected credit is then applied through Form 8974 and the applicable employment tax return.