This page is general information, not legal, tax or financial advice. Talk to a qualified professional about your situation.

A young company with little or no income tax can still use the federal research credit by applying it against payroll tax. For tax years beginning after 2022, a qualified small business can elect to apply up to $500,000 of the credit against its payroll taxes, according to the IRS. To qualify, the company must have gross receipts under $5 million for the year and no gross receipts before the 5-year period ending with that year. The election is made on Form 6765.

Who qualifies

Test Rule (IRS)
Entity Corporation or partnership (and some others, per the Form 6765 instructions)
Gross receipts this year Less than $5 million
History No gross receipts for any tax year before the 5-tax-year period ending with this year
Amount applied to payroll tax Up to $500,000 (tax years beginning after December 31, 2022)

The records behind the claim

Research credit claims rest on documentation of the work and its costs. In a software or product company that evidence lives in issue trackers, repositories, design documents and time records. Keep them for as long as the return can be examined: the IRS’s general period is 3 years, with longer periods in some cases.

That matters if the company later shrinks or closes. Cancelling Jira, GitHub or Google Workspace without exports can delete the evidence for a credit already claimed. The data retention clock shows each vendor’s deadlines.

Other non-dilutive options

The payroll credit is one of several ways to raise cash without giving up equity. Others include SBIR and STTR awards, SBA loans and, for established companies, licensing de-identified operational records. See non-dilutive funding options.

Questions people ask

Can a company with no income tax use the R&D credit?

That is what the payroll election is for: a qualified small business can apply part of the research credit against its payroll tax instead of income tax. Check the qualification rules with your accountant.

What evidence does the claim need?

Records that show the research activities and their costs: who worked on what, wages, supplies and contracts. Project tickets, design documents and time records are often the evidence, so keep them.

Sources

  1. IRS: Qualified small business payroll tax credit for increasing research activities
  2. IRS: Instructions for Form 6765
  3. IRS: How long should I keep records?

Non-dilutive funding options for small companies

Ways to raise cash without selling equity: R&D payroll credits, SBIR awards, SBA loans, revenue-based financing, asset sales and data licensing.

SBA loans for small businesses: 7(a), 504 and microloans compared

Maximum amounts and typical uses of SBA 7(a), 504 and microloans, from SBA's own pages, and where non-dilutive alternatives fit.

Final tax returns when you close a business

The federal returns and forms a closing business files: final income and payroll returns, W-2s, Form 966 within 30 days for corporations, and what to keep.

Part of Raising cash without new equity.