If your company develops software, products or processes, two tax provisions can put real cash back in the business in 2026. One is a deduction that's finally fixed. The other is a credit that works even if you have no taxable income.
1. Immediate R&D expensing is back
From 2022 through 2024, the tax code forced businesses to spread domestic research costs over five years. A software company paying $500,000 in developer salaries could deduct only a fraction in year one and owed tax on income it didn't really have.
The 2025 tax law created Section 174A, which permanently restores immediate deduction of domestic research and experimental costs for tax years beginning after 2024. Your 2025 return, and every one after it, should reflect full expensing. Foreign research still has to be spread over 15 years.
The law also let smaller businesses, those with average gross receipts under $31 million, go back and fix 2022 through 2024. That retroactive election window closed on July 6, 2026. If you missed it, ask your CPA whether any amended-return options remain for your situation.
2. The credit: dollar-for-dollar, not just a deduction
The Section 41 research credit is separate from the deduction and stacks on top of it. A deduction lowers taxable income; a credit lowers the tax itself. A $100,000 credit is worth $100,000; a $100,000 deduction at a 21% rate is worth $21,000.
Qualifying costs include wages for people doing or directly supervising research, supplies used in research, and 65% of payments to contractors doing qualified research in the U.S. The work has to pass a four-part test: a business purpose, technological uncertainty, a process of experimentation, and a basis in hard science or engineering.
3. The payroll offset: credit for companies with no profits
Most startups have no income tax to offset. A qualified small business can instead apply up to $500,000 a year of its research credit against payroll taxes:
Up to $250,000 against the employer share of Social Security tax
Up to $250,000 against the employer share of Medicare tax
To qualify for a given year, the company generally must have less than $5 million in gross receipts that year and no gross receipts in any year more than four years earlier, in other words, it must be in its first five years of revenue. A company can use the payroll offset for up to five years.
How to claim
Calculate the credit and make the payroll election on Form 6765 with your income tax return.
Claim it each quarter on Form 8974, attached to your Form 941 payroll return, starting the quarter after you file.
One interaction to know
Claiming the credit reduces your Section 174A deduction by the amount of the credit, unless you elect a reduced credit under Section 280C. Your advisor can run both ways and pick the better result.
Next step: Start tracking time spent on R&D now. Contemporaneous records, such as project notes, sprint tickets and time allocations, are what hold up in an audit.
Unboring is educational content, not tax advice. R&D credit rules are technical; work with a qualified tax professional.
