Research and Development Tax Credit for Small Businesses

The Inflation Reduction Act increased the tax credit cap from $250,000 to $500,000 beginning in 2023. The credit is elected on the 2023 tax return to offset eligible research and development expenses as a payroll tax offset for the first quarter payroll in 2024 with any excess carried to subsequent payroll quarters.

The research and development credit is applicable to small businesses during their first 5 years in which they have gross receipts of less than $5 million and is not refundable or transferrable. It applies to salaried workers and does not apply to independent contractors.

Research and development expenses must meet a four-part test: developing a new or improved business component; technological in nature; elimination of uncertainty and a process of experimentation.