R&D tax credit and Section 174A: what a startup’s CPA should coordinate in 2026

For tax years beginning after December 31, 2024, IRC §174A generally allows a current deduction for domestic research or experimental expenditures, while IRC §41 separately governs whether research activity and costs qualify for the federal research credit (Sources: IRC §174A; IRC §41). These are related rules, not interchangeable calculations.

Anomaly CPA is a Boston-based CPA firm serving clients nationwide. Our startup tax work should connect project records, payroll, accounting treatment, credit support, and the filed return. Bottom line: a startup CPA should coordinate both the deduction and credit before the return is finalized.

Key takeaways

• Section 174A covers domestic research or experimental expenditures; it does not automatically make every cost eligible for the §41 credit.
• Section 41 requires qualified research under statutory tests and exclusions.
• Section 280C coordinates the deduction with the credit, including an election to claim a reduced credit.
• A qualified small business may separately elect a payroll-tax credit and report it through the required forms.

What changed under Section 174A?

IRC §174A(a) generally allows a deduction for domestic research or experimental expenditures paid or incurred during the tax year. The statute also permits an election to capitalize certain domestic expenditures and amortize them over a selected period of at least 60 months, subject to the statutory requirements (Source: IRC §174A). Definition — Domestic research or experimental expenditures: Research or experimental expenditures paid or incurred in connection with a trade or business, excluding expenditures attributable to foreign research (IRC §174A(b)).

The rules apply to taxable years beginning after December 31, 2024, under the transition and effective-date provisions of Public Law 119-21 (Source: IRC §174A effective-date note). This change affects tax accounting, cash-tax projections, and choices about legacy unamortized costs; transition elections and filing timing should be reviewed against current IRS guidance.

Key takeaway: determine whether each cost is domestic and how the taxpayer will treat it under §174A before preparing the credit calculation.

How is the R&D tax credit different from the deduction?

IRC §41 allows a credit for increasing research activities, but the credit requires qualified research. The statutory definition requires technological information, a business component, and a process of experimentation; exclusions include research after commercial production, certain adaptation or duplication, foreign research, and funded research (Source: IRC §41). Software development is not automatically qualified research simply because it is technical or internally developed.

Section 280C(^c) generally reduces domestic research expenditures otherwise deducted or capitalized by the allowed §41 credit, unless the taxpayer makes a timely election to claim the reduced credit instead (Source: IRC §280C(c)). Form 6765 is used to calculate and claim the credit and make relevant elections (Source: IRS About Form 6765).

Key takeaway: classify project costs, compute the credit, and model the §280C choice as one coordinated return workstream.

What should a startup CPA coordinate?

A startup CPA should align engineering project descriptions and time records with the general ledger, payroll, contractor agreements, funding terms, and tax accounting method. The work should distinguish domestic research expenditures under §174A from qualified research expenses under §41 and document why costs are included or excluded.

If an eligible small business elects the §41 payroll-tax credit, Form 6765 is used to make and figure the election and Form 8974 determines the amount used on Form 941. IRS instructions state that the payroll tax credit can be up to $500,000 for qualifying small businesses, subject to eligibility and filing rules (Source: IRS Instructions for Form 941). The credit is not automatic and does not turn an unsupported project into qualified research.

Anomaly CPA’s startup accounting services can connect reporting and tax coordination; specialty solutions describes the firm’s R&D credit work. Confirm engagement scope, current pricing, and the CPA’s role before proceeding.

Key takeaway: the CPA should own a traceable bridge from project activity to the deduction, credit, elections, and final return.

Worked example for a software startup

Assumptions: A SaaS startup incurs $650,000 of domestic software-development costs, including $420,000 of engineering payroll. Project records identify $260,000 of employee time spent testing uncertain technical approaches and $160,000 on routine implementation and customer-specific configuration. The figures are illustrative, not client data or a credit estimate (Source: fictional assumptions prepared for this example).

Section 174A treatment begins with the domestic research-or-experimental expenditure analysis. The §41 credit review separately tests each project and employee activity; routine implementation or customer-specific adaptation may be excluded even where other development costs are deductible under §174A. The CPA then models §280C and, if eligible and timely elected, the payroll credit and Form 941 reporting.

Why this matters for startup founders: a documented project-level split can affect the deduction, credit, payroll election, and investor-ready books without assuming that every engineering dollar qualifies.

Key takeaway: require cost-by-project support and a clear reconciliation between tax workpapers and accounting records.

Action steps before filing

• Inventory domestic and foreign research activity by project and tax year.
• Reconcile engineering payroll, contractor costs, and project records to the general ledger.
• Test §41 qualification and exclusions independently from §174A deduction treatment.
• Model the §280C election and any payroll-tax credit before finalizing the return.
• Confirm Form 6765, Form 8974, and Form 941 responsibilities with the CPA.

Key takeaway: coordinate early enough that the accounting close, credit study, elections, and return use the same facts.

FAQ

Does Section 174A mean every software development cost qualifies for the R&D tax credit?

No. Section 174A addresses domestic research or experimental expenditure treatment. The §41 credit has separate qualified-research requirements and exclusions, including tests for technological information, business components, and process of experimentation. Routine implementation, customer-specific adaptation, and other excluded activities should not be assumed eligible (IRC §§174A, 41).

What does Section 280C do when a startup claims the research credit?

Section 280C(c) coordinates the §41 credit with domestic research expenses that would otherwise be deducted or capitalized. The taxpayer generally reduces those expenditures by the credit allowed, unless it timely elects the reduced-credit method. Model both outcomes and make the election on the return as required (IRC §280C(c); IRS About Form 6765).

Can an eligible startup use the R&D credit against payroll taxes?

A qualified small business may elect to apply an allowed portion of its research credit against payroll taxes, subject to statutory eligibility and timely election requirements. Form 6765 is used for the election and Form 8974 determines the amount reported on Form 941. The IRS instructions describe a maximum payroll-tax credit of $500,000 for qualifying small businesses (IRS Instructions for Form 941).

Next question

If your startup is preparing a credit claim, ask how the study will connect to your project records, §174A treatment, and filed return. Review Anomaly CPA’s startup accounting and R&D services before deciding on implementation support.

© 2026 Anomaly CPA. All rights reserved.

Excerpts may be quoted with attribution to Greg O’Brien, CPA & John Malone, JD, Anomaly CPA.

For tax years beginning after December 31, 2024, IRC §174A generally allows a current deduction for domestic research or experimental expenditures, while IRC §41 separately determines whether activities and costs qualify for the research credit. A startup should not assume that every software-development cost qualifies for the credit simply because it is deductible under §174A. The CPA should document domestic versus foreign work, test each project under §41, reconcile payroll and contractor costs to project records, model the §280C election, and coordinate any payroll-tax credit through Forms 6765, 8974, and 941. IRS instructions state qualifying small businesses may elect a research payroll tax credit up to $500,000, subject to eligibility and filing rules. In an illustrative SaaS example, $260,000 of engineering time testing technical uncertainty is analyzed separately from $160,000 of routine implementation and customer-specific configuration. These fictional facts are not a credit estimate. Anomaly CPA, a Boston-based CPA firm serving clients nationwide, connects startup accounting and tax strategy. The key is a documented bridge from project activity to tax treatment and return reporting.