A SaaS company can claim a federal R&D tax credit when its work and expenses meet Section 41. Being pre-revenue does not establish eligibility, and having engineers does not make every payroll dollar qualified research.
An eligible small business can elect to use up to $500,000 of its research credit against employer payroll taxes. The election, filing deadline and available payroll tax determine when that benefit can be used. A research credit study starts with those facts.
Median charges $5,000 flat under a $50,000 initial estimated credit, and 10% of the credit at $50,000 and above, for the study and filing. The lower band is a fixed fee, including when the eventual credit is smaller. See Median's R&D service and pricing.
The Two Rules Every Founder Confuses
Section 41 is the research credit. Section 174A governs deductions for domestic research expenditures in tax years beginning after December 31, 2024. Section 174 still requires foreign research costs to be amortized over 15 years.
The credit and the deduction have different requirements. A cost's treatment under Section 174A does not establish that it qualifies for the Section 41 credit. Review the activities, expense categories and exclusions separately. The IRS instructions for Form 6765 explain the credit requirements and the interaction with the research deduction.
What Changed in 2025
Domestic research expenditures paid or incurred in tax years beginning after December 31, 2024 can generally be deducted currently under Section 174A. A taxpayer can instead elect to capitalize them and amortize them over at least 60 months. Foreign research remains on 15-year amortization.
The small-business retroactive election for 2022 through 2024 expired on July 6, 2026. It allowed eligible taxpayers to apply the new domestic research treatment to those earlier years. Do not treat that election as still available.
A separate transition route addresses domestic research costs capitalized in 2022 through 2024. A taxpayer can elect to recover the remaining unamortized amount in the first tax year beginning after December 31, 2024, or ratably over the two-tax-year period beginning with that year. This route has no small-business gross-receipts test and does not share the July 6 deadline.
For a calendar-year company, the first year is 2025. Before filing an unfiled 2025 return, review the capitalization schedules, prior deductions and any election already made. If the return was filed, have the preparer check the applicable method-change procedures before assuming an amended return is the correct route. Revenue Procedure 2025-28 sets out the transition procedures.
Revenue Procedure 2026-32, published in September 2026, modifies several method-change procedures. It does not reopen the expired small-business retroactive election. The preparer needs to apply the current procedures to the specific return.
Who Qualifies for the R&D Credit (Section 41)
To claim the credit, your work has to meet the IRS's "four-part test":
- Permitted purpose: The activity is intended to create or improve a business component (a product, process, software, formula, or technique) in terms of its function, performance, reliability, or quality.
- Elimination of uncertainty: There's technological or methodological uncertainty at the outset of the activity. You don't already know whether or how the result can be achieved.
- Process of experimentation: The work involves systematic trial-and-error, prototyping, testing, modeling, or similar methods. Those activities count only when they satisfy the qualified-research requirements.
- Technological in nature: The work relies on principles of computer science, engineering, physics, chemistry, or biology.
Software projects can qualify, but each business component must meet the test. Routine maintenance, adapting an existing product for a customer, research after commercial production, foreign research and funded research are among the exclusions. Internal-use software has additional requirements. A job title or project label is not evidence of eligibility.
What Expenses Count
The main qualified research expense (QRE) categories are:
Wages. Salary and bonus paid to employees who perform qualified research, support qualified research directly, or supervise qualified research. For most SaaS companies this is the largest category by far: engineers, PMs who work alongside engineering, designers who do functional prototyping, and the CTO or VP Eng who directs research.
When at least 80% of an employee's services are qualified services, the substantially-all rule can allow all of that employee's wages to count. Below that threshold, include only the supported qualified portion. Use records of the services performed rather than a standard percentage by job title.
Supplies. Tangible property used in qualified research, excluding land, improvements to land and depreciable property. Depreciable testing devices and lab equipment do not qualify as supplies.
Contract research. Generally 65% of qualifying payments for research performed on your behalf in the United States. Review the agreement, rights in the results and who bears the research risk. Domestic location alone does not establish eligibility.
Computer rental. Amounts paid for the right to use computers in qualified research can qualify when the computers are located off your premises and you are not their operator or primary user. General cloud infrastructure and SaaS subscriptions do not automatically qualify. Treasury Regulation 1.41-2 describes these expense and wage rules.
How the payroll-tax offset works
To make the payroll-tax election, a qualified small business must have less than $5 million in gross receipts in the credit year and no gross receipts before the five-tax-year period ending with that year. The test concerns the first year of gross receipts, not the incorporation date. Controlled-group rules also matter.
The maximum annual election is $500,000. A taxpayer cannot elect after making the election for five or more preceding tax years. The election must be on an original income tax return filed by its due date, including extensions. It cannot be made or changed on an amended return.
The offset starts in the first calendar quarter beginning after the return that includes the election is filed. Form 8974 accompanies the employment tax return. The elected amount offsets employer Social Security tax and, under the applicable limits, employer Medicare tax. Unused amounts can be used in later quarters. It is not an automatic lump-sum refund.
The IRS payroll-tax credit guidance explains eligibility, election timing and claiming the offset.
The Practical Filing Playbook
Here's the sequence for claiming the credit.
Step 1: Support the wage allocation. Keep records tying the services employees actually performed to qualified projects. Have the preparer assess the allocation method and supporting project and time records. A quarterly survey alone does not establish qualification.
Step 2: Build a contemporaneous project list. Each calendar year, document the R&D projects you worked on. Each project needs a name, description, the technical uncertainty you faced, the experimentation process, and the business component created or improved. This is the backbone of an audit-defensible claim.
Step 3: Calculate the credit. Two methods:
- Regular Credit: 20% of QREs above a historical base. Hard for newer companies to use because they don't have enough history.
- Alternative Simplified Credit (ASC): 14% of QREs above 50% of the average QREs for the prior 3 years. If there were no qualified research expenses in any one of the three preceding tax years, the ASC is 6% of current-year qualified research expenses. First-time filing alone does not determine the rate.
For illustration, $2 million in current-year QREs with no QREs in at least one of the three preceding tax years yields a $120,000 gross ASC before Section 280C. A reduced-credit election produces $94,800 at the 21% corporate rate. Taking the full credit requires the corresponding deduction adjustment. Check the election with the preparer.
Step 4: File Form 6765 with your annual federal tax return (Form 1120 for C-Corps). Elect the payroll tax offset on this form.
Step 5: Claim the payroll offset. Use Form 8974 with the applicable employment tax return, beginning in the first quarter that starts after the income tax return that includes the election was filed. Confirm the employer Social Security and Medicare tax available to absorb the credit.
Step 6: Maintain documentation. Keep project descriptions, wage-allocation evidence and expense records supporting the claimed credit. Retain records needed to substantiate credits used in later carryforward years as well as the original claim. Clean daily bookkeeping supports the expense records.
Do You Need a Specialist?
A specialist should identify qualifying work, tie expenses to the records and explain the filing choices. Ask what the quoted fee covers: the study, Form 6765, coordination with the return preparer and any support after filing.
For Median, the study and filing cost $5,000 flat under a $50,000 initial estimated credit, and 10% of the credit at $50,000 and above. The lower band is not contingent on receiving a credit. Confirm scope before comparing our quote with another provider's percentage fee.
Use the R&D credit calculator for an initial estimate. An estimate does not establish eligibility or replace a documented study.
What Commonly Gets Denied in Audit
A study needs more than a list of engineering salaries. It should identify the business components, explain the technical uncertainty and alternatives evaluated, and support the allocation of wages, qualifying computer rental and contract research to that work.
Review research exclusions and contractor terms before including expenses. Research location, funding, rights in the results and who bears the research risk can change what qualifies. Reconcile the claimed costs to the records, and keep the evidence with the return.
What to check before filing
Start with the research projects and the return's filing status. Then establish qualified expenses, calculate the credit and check whether the payroll-tax election is available. Review domestic research deductions and the remaining 2022 through 2024 capitalized balance separately.
If the books need work before the study, catch-up bookkeeping can establish the expense records. Talk with Median about the study and filing once the projects and records are ready.