R&D Tax Credit Changes in 2026: Startups Can Now Expense Immediately

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored immediate expensing for domestic R&D costs after a painful three-year period of mandatory 5-year amortization.

Startups can now deduct 100% of their engineering salaries, cloud infrastructure, and contractor costs in the year incurred rather than spreading deductions over five years. Combined with the $500,000 annual payroll tax offset available to qualified small businesses, early-stage startups can convert R&D spending into immediate cash savings even if they have zero income tax liability.

What This Guide Covers

• The "For Dummies" version: A plain-English explanation of how R&D tax credits work and why you should care
• What changed: How OBBBA's Section 174A fixed the 2022-2024 amortization problem
• The payroll tax offset: How startups with no profits can still get up to $500K per year in cash back
• What qualifies as R&D: Activities and expenses that count toward your credit
• How to claim it: Forms, deadlines, and the step-by-step filing process
• Retroactive relief: How to potentially get refunds for 2022-2024 tax years
• How Warp helps: Automated Form 8974 filing through your payroll

R&D Tax Credits for Dummies: The Plain-English Version

Let's not pretend we all want to read through all the technical legal documentation. You're here because you need someone to explain it to you like you're 5, we get it. If you want a deep dive, keep reading for all the info you need.

What is the R&D tax credit?

Think of it as the government paying you back for building new things. If your engineers are writing code to solve problems that don't have obvious answers, you're probably doing "qualified research" in the IRS's eyes.

Why should I care if my startup isn't profitable?

Here's the thing most founders miss: you don't need profits to benefit.

Most tax credits are useless to startups because they reduce your income tax bill, and if you're burning cash with no revenue, you have no income tax bill to reduce. The R&D tax credit is different. Qualified small businesses can apply their credits against payroll taxes instead.

Every time you run payroll, you pay 6.2% of wages to Social Security and 1.45% to Medicare. That's real cash leaving your bank account every two weeks. The R&D tax credit lets you keep more of it.

How much money are we talking about?

Up to $500,000 per year in payroll tax savings. Over the 5-year eligibility window, that's potentially $2.5 million in non-dilutive cash.

To put that in founder terms: if you're spending $600K annually on engineering salaries and cloud costs, you could realistically recover $40K-60K per year in payroll taxes. That's 1-2 months of additional runway without giving up a single share.

What counts as R&D?

If your team is doing any of these things, you probably qualify:

• Building new software features (not just fixing bugs)
• Developing algorithms or ML models
• Creating new APIs or integrations
• Improving performance or reliability of existing systems
• Designing hardware prototypes
• Running experiments to figure out if something will work

What doesn't count: routine maintenance, copying existing solutions, QA testing, deploying to production, or making things look prettier.

The four-part test (simplified)

The IRS uses a four-part test to determine if your work qualifies. In plain English:

1. Is it for your business? You're trying to build or improve something you'll sell or use.
2. Is it technical? It relies on engineering, computer science, or hard sciences.
3. Is there uncertainty? At the start, you weren't sure if it would work or how to make it work.
4. Did you experiment? You tried different approaches to figure it out.

If you're building a SaaS product and your engineers are solving non-trivial technical problems, you likely pass all four.

The bottom line

You're already paying engineers to build your product. The R&D tax credit lets you get some of that money back. It's not a loan. It's not dilutive. It's cash you've already spent that the IRS will return to you. Read the rest of this article to dive more in depth what all of this means and how we can help you handle this new adjustment.

What Changed: OBBBA Restored Immediate Expensing

The problem (2022-2024)

The Tax Cuts and Jobs Act of 2017 included a delayed provision that took effect in 2022, forcing companies to capitalize and amortize R&D expenses over 5 years (domestic) or 15 years (foreign) instead of deducting them immediately.

This was devastating for startups. A company spending $1 million on R&D could only deduct $100,000 in year one instead of the full amount. Many startups saw their tax bills increase dramatically despite no change in actual profitability.

The fix (OBBBA, effective January 1, 2025)

The One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025, created new IRC Section 174A. This permanently restores immediate deductibility for domestic R&D expenditures starting for tax years beginning after December 31, 2024.

The restoration is permanent. There's no sunset provision, so you can plan around this going forward.

Retroactive relief for small businesses

If your startup has average annual gross receipts of $31 million or less (tested using 2022-2024), you can elect to retroactively apply immediate expensing to your 2022, 2023, and 2024 tax years by amending those returns. This could unlock significant refunds for taxes overpaid during the amortization period.

Critical deadline: Elections must be made by July 6, 2026 (one year from OBBBA enactment).

The IRS released Revenue Procedure 2025-28 on August 28, 2025, which provides detailed implementation procedures for these elections.

Transition options for unamortized costs

For R&D costs you capitalized in 2022-2024 that remain unamortized, you have three choices:

1. Continue amortizing over the remaining 5-year period
2. Deduct the full remaining balance in 2025 (likely best for most startups)
3. Split the deduction: 50% in 2025, 50% in 2026

The $500,000 Payroll Tax Offset: Cash Without Profits

The most powerful R&D tax benefit for early-stage startups is the ability to apply credits against payroll taxes instead of income taxes. If you have no income tax liability because you're pre-revenue or unprofitable, this converts your R&D spending into actual cash savings immediately.

Eligibility requirements (Qualified Small Business status)

To qualify for the payroll tax offset under Section 41(h), your startup must meet both criteria:

Important clarification: A company can exist for 10+ years and still qualify if it had $0 gross receipts (common in life sciences awaiting FDA approval). The test is when you first had gross receipts, not when you were founded.

How much you can offset: $500,000 annually

The Inflation Reduction Act of 2022 doubled the limit from $250,000 to $500,000 per year, effective for tax years beginning after December 31, 2022:

• Up to $250,000 against employer Social Security tax (6.2%)
• Up to $250,000 against employer Medicare tax (1.45%)

Over the 5-year eligibility window, the maximum lifetime benefit is $2.5 million in payroll tax savings.

When you actually receive the benefit

The credit applies starting in the first calendar quarter that begins after you file your income tax return:

Unused credits carry forward for up to 20 years, so you won't lose the benefit if you can't use it all immediately.

What Counts as Qualified R&D: Activities and Expenses

The four-part test for qualified research activities

Every activity must pass all four tests to generate R&D credits:

1. Section 174 Test: The research must be in connection with your trade or business, aimed at discovering information to eliminate uncertainty about developing or improving a product.

2. Technological in Nature: Must rely on principles of physical sciences, biological sciences, engineering, or computer science.

3. Permitted Purpose: Must relate to new or improved function, performance, reliability, or quality (not style, taste, or cosmetic changes).

4. Process of Experimentation: At least 80% of activities must involve identifying uncertainty, evaluating alternatives, and conducting experiments to resolve that uncertainty.

Software development: what qualifies and what doesn't

Typically Qualifies:

• Developing new software products
• Algorithm development (AI/ML)
• API development and integration
• Performance optimization
• Security protocol development
• Architecture redesign (e.g., monolithic to microservices)

Does Not Qualify:

• Adapting existing software to customer needs
• Routine debugging post-production
• Hosting production environments
• Routine data collection
• Consumer preference testing
• Duplicating existing software from specs

Internal-use software (tools you build for your own operations) must meet an additional "high threshold of innovation" test, making it significantly harder to qualify.

Qualified Research Expenses (QREs): what you can claim

Employee wages (W-2): If an employee spends 80% or more of their time on qualified research, 100% of their wages qualify. Below 80%, only the actual percentage qualifies. This includes salaries, bonuses, and stock option exercises (when exercised), but not benefits like 401(k) contributions or health insurance.

Contractor costs: Only 65% of payments to U.S.-based contractors for qualified research is eligible. The contractor must perform work in the U.S., and you must retain substantial rights to the research.

Supplies: Tangible items directly consumed in research, including prototyping materials, laboratory supplies, and development hardware (non-depreciable items only).

Cloud computing costs (AWS, Azure, GCP): This is a significant opportunity many startups miss. Cloud costs for development, staging, and testing environments qualify at 100% (treated as computer rental under Treasury Regulation § 1.41-2(b)(4)). Production environment costs do not qualify.

Documentation tip: Tag your cloud resources by environment (dev/staging/prod) to easily segregate qualifying expenses at year-end.

Forms and Filing: A Step-by-Step Process

Form 6765: Credit for Increasing Research Activities

Form 6765 is the primary form for calculating and claiming your R&D credit. Key sections for startups:

Good news for startups: If you're electing the payroll tax credit, you're exempt from the new Section G detailed reporting requirements that will be mandatory for larger companies starting in 2026.

Section 280C election (critical): You must either reduce your R&D expense deduction by the credit amount OR elect to take a reduced credit (multiply by 79%). This election must be made on your original, timely-filed return and cannot be changed on an amended return.

Form 8974: Qualified Small Business Payroll Tax Credit

After making the payroll tax election on Form 6765, you claim the actual credit on Form 8974, attached to your quarterly Form 941.

Complete filing timeline for startups

Critical rule: The payroll tax election cannot be made on an amended return. If you miss the original filing deadline (including extensions), you lose the ability to elect payroll tax treatment for that year.

How Warp Helps You Automate R&D Tax Credit Filing

Claiming R&D credits shouldn't mean more paperwork for you.

Warp automatically submits your R&D credits form (Form 8974) to the IRS as part of your quarterly payroll tax filings. This ensures your credits are properly claimed without additional paperwork on your end.

How it works:

1. Your CPA prepares Form 6765 (the annual R&D tax credit application) and Form 8974 as part of your income tax filing
2. Submit both forms to Warp at support@joinwarp.com
3. Warp files Form 8974 with your quarterly Form 941
4. The IRS processes your claim and sends you a refund check at the end of each applicable quarter

What you'll receive: Expect your R&D credit refund check within 4-8 weeks after the end of the applicable quarter, similar to other IRS refund processing times. The IRS will send the check to your official business legal address on file.

What you need to do: Simply ensure your R&D expenses are properly tracked and documented. Warp handles the filing, and you receive the credit directly from the IRS by check.

Action Items for Startup Founders

The R&D tax credit environment is more favorable for startups than it's been in years. Three key actions to take now:

1. Evaluate retroactive relief (deadline: July 6, 2026). If your average gross receipts for 2022-2024 were $31 million or less, you can amend those returns to immediately expense R&D costs you were forced to amortize. Model the cash flow impact with your tax advisor.

2. Implement QRE tracking systems. Tag cloud resources by environment, track developer time by project, and document the "technological uncertainty" your team is solving. Contemporaneous documentation is critical if audited.

3. Don't miss the payroll tax election deadline. This election can only be made on your original, timely-filed return. Calendar it now: for 2025 credits, you must file Form 6765 with Section D completed by your 2025 return deadline (including extensions).

The combination of restored immediate expensing under Section 174A and the $500,000 payroll tax offset under Section 41 makes R&D tax credits one of the most valuable non-dilutive funding sources available to early-stage startups.

Key Takeaways

• Immediate expensing is back. OBBBA permanently restored the ability to deduct 100% of domestic R&D costs in the year incurred, effective January 1, 2025.
• Startups can get cash even without profits. The payroll tax offset lets you apply up to $500K annually against Social Security and Medicare taxes.
• The retroactive window is open. Small businesses can amend 2022-2024 returns to reclaim deductions lost to amortization, but must act by July 6, 2026.
• Documentation matters. Track engineering time by project, tag cloud resources by environment, and document the technical uncertainty you're solving.
• Don't miss the election deadline. The payroll tax election must be made on your original tax return. Miss it, and you lose the benefit for that year.
  

Warp is the only AI-native HR & Payroll platform built for startups. Instead of clicking through clunky dashboards or .gov websites for taxes, Warp's AI agents open every state tax account, file every payroll form, and resolve every tax notice automatically.

Every company gets a dedicated Account Manager and Benefits Advisor included to guide them through payroll setup, multi-state expansion, and benefits selection. With Warp, you'll never visit a government website, negotiate with tax agencies, or pay accountants $150 per filing.

Just focus on building your business while Warp handles payroll, compliance, and benefits for your team across any state or country. Join thousands of fast-growing startups who trust Warp to stay compliant while they scale.

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