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Start-ups and Small Business


Start-up companies and small businesses may be eligible to apply up to $1.25 million—or $250,000 each year for up to five years—of the federal R&D credit to offset the Federal Insurance Contributions Act (FICA) portion of their payroll taxes each year.

To be eligible, a company must meet two requirements:

  • Have less than $5 million in gross receipts for the credit year

  • Have no more than five years of gross receipts

The R&D credit is calculated on the federal income tax return as usual and may be applied against payroll taxes starting the quarter after the credit is claimed. For calendar-year taxpayers, the R&D credit can be applied against payroll taxes as early as July of the following year.


What is a Qualified Small Business


A business is a qualified small business if it meets the following three criteria

  • Has gross receipts/revenues of less than $5 million for the current tax year.

  • Has gross receipts/revenues for five years or less. The business must not have gross receipts for any tax year before the 5-tax-year period ending with the tax year they are applying for. For example, businesses that have generated gross receipts prior to 2016 are not eligible to use the R&D credits from the fiscal year 2020 to offset Social Security taxes.

  • Is not a tax-exempt organization under section 501.

Although the law is intended to benefit small businesses, larger businesses can also benefit from the qualified small business criteria. For example, a significant percentage of life science companies have zero gross receipts for long periods of time until their drug receives FDA approval.