Question 1

What is the R&D tax credit?

Accepted Answer

The R&D tax credit (Section 41) is a federal tax incentive that rewards companies for investing in research and development activities in the US. Startups can claim up to $500,000 per year against payroll taxes, even if they have no income tax liability.

Question 2

How much is the R&D tax credit worth?

Accepted Answer

Using the Alternative Simplified Credit method, the credit is approximately 14% of qualifying research expenses (QREs) that exceed 50% of the average QREs for the prior 3 years. Pre-revenue startups can apply up to $250,000/year against payroll taxes.

Question 3

What qualifies as R&D for the tax credit?

Accepted Answer

Qualifying activities include developing new products or software, improving existing products, building prototypes, and developing new processes. The work must involve technological uncertainty and a process of experimentation. Most software development qualifies.

R&D Tax Credit Estimator