Startup Companies:

If your business has less than $5 million in annual gross receipts and fewer than five years of revenue history, you may qualify to apply the R&D tax credit toward your Social Security payroll tax liability under the PATH Act. This allows eligible startups to benefit from the credit even if they are not yet profitable.

If your business does not qualify for the PATH Act payroll tax offset, you may still be eligible to claim the traditional R&D tax credit against federal income taxes. In many cases, the credit can also be carried forward to future tax years.

Yes. A common misconception about the Research & Development (R&D) Tax Credit is that a business must be profitable to benefit. While that was true prior to 2016, the credit was permanently expanded under the PATH Act of 2015, making it accessible to many startups and early-stage companies.

Under current IRS guidance, qualified small businesses can use the R&D tax credit to offset up to $250,000 of the employer portion of Social Security payroll taxes in an eligible tax year. This allows startups to realize immediate savings—even if they are not yet generating taxable income.

Eligibility Requirements:

To qualify, your business must:

Have less than $5 million in gross receipts in the current tax year, and

Have no gross receipts more than five years prior to the current tax year

This benefit applies to timely filed (on-time) tax returns, not amended returns.

To qualify for the Research & Development (R&D) Tax Credit, activities must meet the IRS’s four-part test. Many businesses are surprised to learn that routine innovation and problem-solving often qualify.

1. Technical Uncertainty

The work is performed to resolve uncertainty about how to develop or improve a product or process. This can include uncertainty related to design, capability, method, or performance—such as improving software, equipment, formulas, or production techniques.

2. Process of Experimentation

The activity involves a systematic process to evaluate alternatives and resolve technical challenges. This may include modeling, simulations, prototyping, testing, or trial-and-error methods to determine the best solution.

3. Technological in Nature

The experimentation is grounded in the principles of hard sciences, including engineering, computer science, biology, chemistry, or physics.

4. Qualified Purpose

The goal of the activity must be to create a new or improved product, process, or software that enhances performance, functionality, reliability, or quality.

The size of your R&D tax credit depends on your qualifying research expenses and how the credit is applied.

When claimed against income taxes, there is no overall cap on the amount of R&D credit a business can generate. In most cases, credits range from 5% to 15% of qualifying R&D expenses.

For eligible startups using the PATH Act R&D payroll tax credit, businesses can apply up to $500,000* per year against employer payroll taxes, with any remaining credit potentially applied against income taxes.

Example:

A pre-revenue or unprofitable five-person technology startup with under $5 million in annual revenue—where approximately 80% of employee time is spent on qualifying R&D and the average salary is $100,000—could generate an estimated R&D tax credit of $20,000 to $60,000.

Tax Prep Advocates’ fees are structured as a small percentage of qualifying R&D expenses and are typically more than offset by the tax savings generated through the credit.

*Payroll tax credit limits are subject to annual IRS thresholds: $500,000 for the 2023 tax year and $250,000 for the 2022 tax year.

Yes. Businesses may claim the R&D tax credit for prior tax years by filing amended income tax returns, typically going back up to three years, provided those years are still open under IRS rules.

However, it’s important to note that the PATH Act payroll tax credit is only available on original, timely filed returns and cannot be applied retroactively through an amended return.

Our team can evaluate your prior filings, determine eligibility, and prepare the necessary amendments to help you capture any R&D tax credits you may have missed.

Yes. S1Advisors includes unlimited audit support with every R&D tax credit study at no additional cost.

If your R&D claim is ever reviewed, our experienced R&D tax credit specialists will assist you throughout the audit process. We provide guidance, documentation support, and direct consultation to help you respond to IRS inquiries and navigate the applicable provisions of the Internal Revenue Code.

Our goal is to ensure your claim is well-supported, defensible, and handled with confidence—so you’re never navigating an audit alone.

Yes. Most U.S. states currently offer their own version of the R&D tax credit. In general, state programs closely follow federal guidelines for qualifying R&D activities and expenses, though specific rules and limitations can vary by state.

S1Advisors evaluates your eligibility for both federal and state R&D tax credits and provides guidance on how state-specific rules may apply to your business.

Example:

California offers an R&D tax credit that is non-refundable, meaning it cannot be applied against payroll taxes. To qualify, the research activities must be performed in California. Any unused California R&D credits may be carried forward indefinitely until fully utilized.

S1Advisors strongly recommends completing an R&D study before claiming the R&D tax credit. An R&D study determines the accurate amount of credit your business qualifies for and compiles the technical and financial documentation required to support the claim.

While the IRS requires specific tax forms to be filed to claim the R&D credit, those filings alone are not enough. Businesses must also be prepared to substantiate the credit with detailed technical narratives, financial calculations, and supporting records if the claim is ever reviewed.

Without this documentation, an IRS audit could result in the credit being disallowed—requiring repayment of the credit and potentially additional penalties. An R&D study helps protect your business by ensuring your claim is accurate, compliant, and fully defensible.

S1Advisors provides end-to-end support for claiming R&D tax credits, ensuring accuracy, compliance, and peace of mind throughout the process. Our services include:

✓ Identification and Calculation of Qualified R&D Expenses

We analyze your activities and costs to accurately determine all eligible R&D expenses.

✓ Preparation of Required IRS Forms

We prepare Form 6765 and/or Form 8974. If you choose to work with Tax Prep Advocates for tax preparation, we’ll also file these forms on your behalf.

✓ Comprehensive Technical & Financial Documentation

We prepare detailed support, including research narratives, time allocation analysis, and R&D payroll expense documentation—critical for audit readiness.

✓ Coordination With Your Financial Team

We work directly with your CPA, tax preparer, payroll provider, and accountant to ensure consistency and accuracy across your books and tax filings.

✓ Ongoing Payroll Credit Application

We help ensure the R&D credit is correctly applied against eligible payroll tax liabilities.

✓ Direct Access to R&D Tax Credit Experts

You receive ongoing email and phone support from experienced R&D credit specialists whenever questions arise.

Are There Any Guarantees?

Yes. S1Advisors offers an Accurate Calculation Guarantee. We stand behind the accuracy of our R&D tax credit studies and guarantee our calculations up to $1 million against errors in your study.

This guarantee reflects our commitment to precision, compliance, and delivering reliable results you can trust.