In 1981 Congress created a new set of tax incentives to encourage companies to engage in research and development. Now, that temporary law is a permanent part of the taxation landscape. R&D tax credits for small businesses add up to billions of dollars each year and have assisted the growth of a wide range of R&D projects in all industries.

Unfortunately, many smaller companies are under the impression that they are unable to take advantage of these credits. The truth is that any corporation can qualify as long as their expenses are well documented and fall under the definition of “R&D,” according to the specific terms of the Congressional legislation.

A typical small business accountant or small business tax planning professional might not be acquainted with all the ins and outs of the R&D tax guidelines.

It’s helpful for any business owner to ask two questions about the credit, namely, “What is it,” and “How much of credit can I take against income?”

What Is It & How High Can It Be?

Every small business CPA knows the basic outline of the guidelines, namely that the IRS allows up to $250,000 in annual credit, with a limit of $1,250,000 over a five-year period. But what is often forgotten is that a company must not have any revenue for more than five years prior to taking the credit. In addition, none of the past five years can include any years with more than $5 million in revenue. Those two provisions are in the law to specifically benefit newer, smaller companies.

R&D tax credits for small businesses are part of an overall legislative strategy to spur economic growth. A small business CPA who files for R&D tax credits need to be familiar with all parts of the law. When it comes to small business tax planning, record-keeping and accuracy are essential components of the total corporate mission.


One of the key provisions of the tax credit regulations pertains to timing. When companies have credits in excess of the annual maximum, they have a choice to carry them forward or backward. However, the carry-back provision only allows for a one-year window. The carry-forward rule is much more lenient, allowing for a 20-year window in which excess credits can be used against payroll taxes owed.

Alternative Minimum Taxes

There’s a special part of the law that covers small businesses who owe AMT in a given year, are privately held, and have less than $50 million in average gross receipts during the previous three-year period. If a company meets all those criteria, they can use their R&D credits against both payroll and alternative minimum tax liabilities.

Where To Begin

It’s important for small business bookkeeping staff to keep accurate, detailed records of all expenses. But especially in the case of “research and development” expenses. One reason for the high degree of attention is that the IRS is known to challenge some firms that take the tax credit and demand extensive documentation of every dollar related to the R&D activities. We at Fusion CPA understand the challenge is critical. For this reason, our small business accountants provide high-quality small business bookkeeping services that cover all the detailed requirements of the R&D tax credit laws. We also offer a full range of tax planning and accountancy services to simplify your search for financial management support. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!


This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive