R&D Tax Credits — A Clear Guide for Founders
Updated December 2025
What qualifies, what doesn’t, and how to avoid risky “credit mill” studies
If you’re building a software, SaaS, or product-driven startup, you’ve probably heard mixed things about the startup R&D tax credit. Some firms describe it as easy money. Others make it feel complex, risky, or only relevant much later.
The truth sits in between.
This guide is designed to help founders, operators, and CFOs understand what the R&D tax credit is, who typically qualifies, how the credit behaves in practice, and why approach matters — without hype or pressure to act.
Jump to what matters most:
What the R&D Tax Credit Is (Plain English)
At a high level, the R&D tax credit is a way for startups, tech companies, engineering firms, and more to get money back from the IRS for building and improving products.
For most early-stage companies, it shows up as:
A payroll tax credit that directly reduces certain taxes you’re already paying
Available even if you’re pre-revenue or unprofitable
Tied to engineering and technical work, not whether the business ultimately succeeds
Based on what your team is actually doing, not buzzwords or pitch decks
In practice, this means that if you’re running payroll in the U.S. and doing real technical development, the government may reimburse part of that cost through reduced tax payments.
The credit is applied after expenses are incurred, typically against payroll taxes, and the benefit is realized over time as those filings are made. For many startups, this can materially improve cash flow and extend runway — sometimes by a meaningful amount over multiple years.
Like any tax benefit, there are rules. The credit isn’t automatic, and it needs to be supported by documentation. But when handled correctly, it’s one of the few ways startups can legitimately turn ongoing operating costs into real cash savings.
Who Typically Qualifies (and Who Usually Doesn’t)
While every situation is different, there are clear patterns in which companies tend to qualify for the startup R&D tax credit.
Often qualifies:
Software and SaaS companies
Product-driven startups
Engineering, data, ML, or infrastructure work
Iterative development with unknown technical outcomes
These companies are usually solving problems where the solution is not known in advance and where multiple technical approaches are tested or refined.
Usually doesn’t:
Pure consulting or services businesses
Marketing-only or growth work
Cosmetic UI or design changes
Off-the-shelf software implementations
This section alone helps many founders decide whether it’s worth going deeper. If your work doesn’t involve technical uncertainty or experimentation, the credit may not be a good fit.
How an R&D Credit Study Works (High Level)
A legitimate R&D credit study is more than a form or a spreadsheet. At a high level, it usually includes:
Technical interviews to understand what work was actually performed
Identification of qualifying expenses, typically payroll-related
Documentation and methodology aligned with tax rules
Filing support with the tax return
An audit-ready support package
The details matter — especially how activities, roles, and expenses are connected — but this is the basic flow.
In practice, the strongest companies approach this with a streamlined, software-friendly process. They avoid one-off spreadsheets, long email threads, and last-minute reconstructions of work that happened months earlier. Instead, information is gathered in a structured way that’s easier to review, easier to defend, and easier to repeat as the company grows.
Studies that skip steps, rely on generic templates, or treat documentation as an afterthought tend to create problems later — even when the underlying R&D work is legitimate.
How the Credit Behaves — and How Much It Can Be Worth
For most early-stage startups (especially when pre-revenue or early in the revenue journey), the R&D tax credit is first used as a payroll tax credit, rather than an income tax credit.
In practice, that means:
Eligible startups can offset up to $500,000 per year of employer payroll taxes
The credit is applied through payroll filings, so the benefit shows up over time rather than as a one-time refund
The value scales primarily with engineering-heavy payroll, not total headcount
Income tax credit for profitable companies is always an available option, even once the payroll tax credit window expires.
For companies that continue investing in product development, the credit can be claimed year after year, not just once.
As a company grows or becomes profitable, unused R&D credits don’t disappear — they simply shift from payroll relief to future income tax offsets. There is no dollar cap on how much of the credit can ultimately be used this way, and unused credits can generally be carried forward for up to 20 years.
For startups with meaningful engineering spend, this can translate into real, recurring cash savings over the life of the company. When approached correctly, the R&D credit becomes a repeatable operating lever — turning ongoing product development costs into reduced tax payments and extended runway.
Common Myths and Misconceptions
A few misunderstandings come up repeatedly when founders first look into the startup R&D tax credit. Clearing these up early helps avoid frustration — and helps companies approach the credit in a way that actually works.
“The payroll credit is paid out all at once.”
For most startups, the credit is applied gradually through payroll tax filing refunds. It reduces specific employer payroll taxes over time rather than showing up as a single lump-sum payment.“If we qualify once, it’s automatic every year.”
Each tax year stands on its own. Eligibility depends on the work performed, the roles involved, and how activities and expenses are documented in that year. Companies that continue investing in product development may be able to claim the credit repeatedly — but it still has to be supported each time.“Only breakthrough innovation counts.”
The bar isn’t whether a product is revolutionary or commercially successful. Qualifications can be broader than many founders expect, especially for software and technical teams, but they still require real technical uncertainty and experimentation — not routine work or implementation.“The study alone creates the credit.”
The study supports the claim, but it doesn’t replace proper accounting, payroll reporting, and filing. How expenses are tracked and how documentation ties back to real activity matters just as much as the study itself.
These misconceptions are often what lead startups to either overestimate what the credit will do for them — or avoid it altogether when it could have been valuable. Understanding how the credit actually behaves makes it easier to evaluate whether pursuing it is worthwhile and how to do so responsibly.
A Note on Section 174, OBBBA, and Recent Law Changes
Recent changes under Section 174, including those introduced through the OBBBA (One Big Beautiful Bill Act), have made the relationship between R&D expenses, accounting treatment, and tax outcomes more complex — especially for startups.
While this guide isn’t a deep dive into those rules, there are a few important realities founders should understand:
R&D credits and R&D expense treatment are now more closely intertwined.
How R&D costs are categorized and capitalized under Section 174 can directly affect taxable income, timing, and how the credit fits into the broader tax picture.Timing and accounting decisions matter more than they used to.
The credit itself hasn’t gone away, but the surrounding tax mechanics have changed. Decisions made during the year — not just at filing time — now have a bigger impact on outcomes.Foreign R&D is treated very differently than U.S.-based R&D.
Work performed outside the U.S. generally does not qualify for the federal R&D credit, and it is also subject to less favorable capitalization rules under Section 174. This distinction is frequently misunderstood or glossed over, leading to incorrect expectations or improperly structured claims.Not all R&D providers are equipped to handle this complexity.
Many “credit mills” focus narrowly on producing a study, without CPA-level expertise in tax strategy, accounting treatment, or how the credit interacts with the rest of the return. That gap can create downstream issues even when the underlying R&D work is legitimate.
Taken together, these changes are a major reason the R&D credit shouldn’t be treated as a standalone project. It now sits inside a larger system — involving payroll, accounting, expense treatment, and overall tax posture — and needs to be handled in a way that reflects that reality.
A lack of professional tax and accounting rigor in an R&D study is one of the strongest indicators of audit risk.
Why “Easy R&D Credits” Are Often a Problem
Many problems with R&D credits don’t arise because a company failed to qualify. They arise because of how the credit was pursued.
In response to demand, an entire category of “R&D tax credits companies” has emerged that treats the credit as a standalone deliverable — something to be produced quickly, priced aggressively, and justified after the fact. That approach often conflicts with how the credit is meant to work inside a company’s broader tax and accounting system.
Common red flags include:
Contingency-only “credit mills.”
When a provider is paid only as a percentage of the credit, incentives skew toward maximizing the number rather than ensuring the claim is defensible and properly integrated with the rest of the return.Claims built backward from a target amount.
Some studies start with “how much credit can we get?” instead of “what work actually qualifies?” That reversal is one of the fastest ways to create audit risk.Minimal or recycled documentation.
Generic narratives, reused templates, or documentation created without a clear link to payroll, roles, and activities often fail under scrutiny — even when real R&D work occurred.Narrow focus on the study, not the full tax picture.
Providers without CPA-level tax and accounting expertise may overlook how the credit interacts with Section 174, foreign R&D treatment, payroll filings, or overall tax posture. Those gaps tend to surface later, when they’re harder to fix.
As IRS scrutiny increases, these issues matter more than they used to. The credit itself hasn’t disappeared — but the margin for sloppy execution has.
Understanding these risks upfront helps founders evaluate providers more clearly and avoid approaches that look attractive on the surface but create unnecessary exposure over time.
Our Approach to R&D Credits — and Why It’s Structured This Way
The founder of The Millennial CPA is a licensed CPA in New York and Virginia with more than six years of hands-on experience helping technology startups claim the R&D tax credit. That work spans hundreds of engagements across pre-seed, seed, Series A, Series B, and Series C+ technology companies — from early teams with simple payroll to later-stage startups operating across more complex entity and ownership structures. Credit amounts have ranged from small early-stage claims to multi-million-dollar credits integrated into broader tax-saving strategies.
Across that volume of work, one pattern shows up consistently: the success of an R&D credit has far less to do with the study itself and far more to do with how the credit fits into the company’s broader tax and accounting system. Payroll treatment, expense capitalization under Section 174, foreign versus U.S. activity, and overall tax posture all influence whether a credit is usable, defensible, and repeatable as the business grows. Different stages require different approaches — and the right outcome depends on where a company actually is, not where it hopes to be.
That exposure is why the R&D credit is approached as an integrated tax process, not a standalone deliverable. When credits are pursued in isolation — or without CPA-level tax and accounting judgment — issues tend to surface later, often during audits or when stakes are higher. The goal is straightforward: help startups claim the credit in a way that reflects how the business actually operates and holds up over time.
Not Sure If This Applies to You?
If you’re unsure whether an R&D credit study makes sense for your startup, a quick eligibility check can help you decide before committing time or money.