If you’re building a startup and spending money on developing software, products, or processes, there is a very good chance the IRS owes you money. Most startup founders have no idea this opportunity exists. Fewer still know that a new law just changed the rules significantly — and that some of those changes come with a deadline that is days away.

Here’s what you need to know.

What Changed and Why It Matters Now

For years, founders could fully deduct their research and development costs in the year they were incurred. In 2022, that changed. A provision buried in the 2017 Tax Cuts and Jobs Act required businesses to amortize R&D expenses — meaning spread the deduction out over 5 years (or 15 years for foreign research) rather than taking it all at once. For startups that are burning cash on development and desperately need deductions now, this was a gut punch.

The good news: Congress fixed it.

The One Big Beautiful Bill Act, signed into law in 2025, restored full immediate expensing of domestic R&D costs starting with tax year 2025. Under the new Section 174A, if you spend money on qualifying research in 2025 or later, you deduct 100% of it in the year it’s incurred. No amortization. Done.

The Deadline You Cannot Miss: July 6, 2026

Here is where it gets urgent.

If your startup had average annual gross receipts under $31 million, you may be eligible to amend your 2022, 2023, and 2024 tax returns to retroactively claim the R&D deductions you had to amortize under the old rules. That could mean significant refunds — potentially tens of thousands of dollars — coming back to your business.

The window to file those amended returns closes July 6, 2026.

That is one week away.

If you think you may qualify and you haven’t looked into this yet, stop reading and call a tax professional today. This deadline will not be extended.

The R&D Tax Credit: Cash in Your Pocket Even When You're Not Profitable

Beyond the deduction, there is a separate and often more valuable benefit: the Section 41 Research & Development Tax Credit.

This is not a deduction — it is a dollar-for-dollar reduction in your tax bill. The credit is generally 20% of qualifying research expenses above a base amount, calculated using the regular credit method, or a simplified flat credit of 14% of QREs above 50% of your average QREs from the prior three years.

For early-stage startups, the credit has one feature that changes everything.

The Payroll Tax Offset

If your startup has less than $5 million in gross receipts and has not had gross receipts for more than five years, you qualify as a Qualified Small Business (QSB). This means you can apply your R&D credit against your employer payroll taxes — not just your income tax.

Why does that matter? Because most startups aren't profitable. An income tax credit is worthless if you have no income tax liability. But every startup with employees is paying payroll taxes every quarter, regardless of profitability.

Under the rules updated by the new law:

A startup that files its 2025 return can begin offsetting payroll taxes as early as Q2 2026. That is real cash staying in your business instead of going to the IRS.

What Counts as Qualifying Research?

This is where many startups underestimate their eligibility. You do not need to be a lab in a white coat. The IRS uses a four-part test:

  1. Technological in nature — the activity must rely on principles of physical, biological, computer, or engineering science
  2. Permitted purpose — the research is intended to develop a new or improved product, process, software, or formula
  3. Elimination of uncertainty — there must be genuine uncertainty about whether or how the capability can be achieved
  4. Process of experimentation — you must be evaluating alternatives through testing, modeling, or simulation

In practice, this covers a wide range of startup activities: developing software from scratch, building new product features, testing manufacturing processes, creating algorithms, and engineering prototypes. It does not cover market research, customer surveys, routine data collection, or activities that occur after commercial production begins.

Qualifying expenses (called Qualified Research Expenses, or QREs) include:

What You Need to Document

The R&D credit is legitimate, powerful, and available to businesses that qualify — but the IRS scrutinizes it. Documentation is critical. At minimum, you should be tracking:

Starting this documentation now — even informally — protects your ability to claim the credit in future years and survive any IRS inquiry.

The Bottom Line for Startups

If you are spending money building something new — writing code, developing a product, engineering a process — you are very likely doing qualifying research. That means:

These are not obscure loopholes. They are provisions Congress created specifically to encourage businesses like yours to invest in innovation. The mistake is not knowing they exist.

If you want to understand what your startup may be eligible for, I am happy to have a conversation. The analysis is straightforward when you have the right information in front of you.