Learn which tax credits your startup may qualify for, including the R&D tax credit, payroll tax savings, and other incentives founders should know.
Nobody starts a company because they’re excited to pay taxes.
But taxes can become one of your startup’s biggest expenses—and one of the easiest places to miss an opportunity to save.
The good news is that the tax code includes incentives designed to help businesses invest, hire, innovate, and grow. For a startup, those incentives can mean more cash staying in the business to fund another hire, build your next product, or extend your runway.
The important thing isn't knowing every tax credit that exists. It's knowing which ones are relevant to the way your startup operates—and making sure you're claiming them when you qualify.
A tax credit directly reduces the amount of tax you owe. A tax deduction works differently: it reduces your taxable income.
That distinction matters. A $10,000 tax credit generally reduces your tax liability by $10,000, while the value of a $10,000 deduction depends on your tax rate.
For startups, the bigger question is: Which tax credits actually apply to my business?
That depends on things like:
The important thing isn't knowing every provision in the tax code. It's knowing which opportunities fit your business and making sure they don't get overlooked.
There are several federal, state, and local incentives that may be available to startups. The right ones depend on your business, but these are worth knowing about:
For most of Fondo's startup customers, the R&D tax credit is the biggest opportunity. But it isn't the only one.
The federal R&D tax credit is designed to encourage businesses to invest in research and development.
For startups, that can mean much more than traditional scientific research.
If your company is building software, developing a new product, solving technical problems, or figuring out how to make new technology work, you may already be doing work that qualifies.
R&D activities can include:
For tax purposes, qualifying research generally involves developing or improving something, facing a technical problem or uncertainty, and experimenting with different approaches to solve it.
In plain English: You were trying to build or improve something, you didn't know exactly how to make it work, and your team tested different approaches to figure it out.
As we discussed earlier, there are two ways to claim the R&D Credit, the method that is most advantageous to startups is via the payroll tax credit. Eligible startups include those that
Potentially.
The best place to start is the work your team is actually doing.
Ask yourself:
Are we trying to build or improve something, and do we have to experiment or test different approaches to figure out how to make it work?
If so, there may be qualifying research happening inside your company.
For example, imagine your software startup is building a new data platform. Your engineers aren't sure which database architecture will handle the volume you're expecting, so they test several approaches, build prototypes, and compare the results.
That experimentation may qualify as R&D.
On the other hand, fixing a known bug, changing the colors on your website, or performing routine software maintenance generally wouldn't qualify simply because an engineer worked on it.
Yes, potentially—and that's one reason the R&D credit is particularly valuable to early-stage companies.
An eligible qualified small business can elect to use up to $500,000 of its federal R&D credit against certain employer payroll taxes, subject to the applicable requirements.
For a startup that's burning cash, this can be especially valuable. Instead of waiting until you're profitable to benefit from the credit, an eligible startup may be able to use it to reduce certain payroll taxes while continuing to reinvest in the business.
The $500,000 figure is a maximum election amount, not a guaranteed credit. Your actual credit depends on your qualified research expenses and the applicable calculation.
There's no standard amount. Your credit depends on your company's qualified research expenses and the applicable calculation.
Depending on the circumstances, qualifying expenses can include:
For many startups, employee wages make up the largest part of the calculation.
You can't simply take your total engineering payroll and apply a percentage, though. The work your employees perform and the expenses associated with that work need to meet the requirements.
If you've heard other founders talking about Section 174, here's the part you need to know: the rules for deducting domestic R&D expenses changed for 2025 and beyond.
Under the previous rules, startups generally had to spread certain R&D expenses over several years rather than deducting them all at once. Starting with tax years after December 31, 2024, qualifying domestic R&D expenses can generally be deducted in the year they're incurred.
Section 174A and the R&D tax credit are separate tax benefits. Section 174A deals with how you deduct R&D expenses, while the R&D tax credit can provide an additional tax benefit.
If your startup had R&D expenses in 2022–2024, there may also be transition rules worth discussing with your tax advisor.
The process comes down to four steps:
Identify the work. Document it. Calculate the credit. File the required forms.
Look at what your engineering and product teams worked on during the tax year.
Ask:
Your qualifying R&D probably isn't sitting in a folder labeled “R&D.” At a startup, it's often embedded in everyday product development.
Once you've identified qualifying activities, you need to connect them to the expenses associated with that work.
This is where clean bookkeeping helps. Your financial records show what you spent; your project records help show what you spent it on and why.
Useful documentation can include:
You don't need your engineers filling out tax forms every week. But having good records throughout the year makes it much easier to support your claim later.
An R&D tax credit study connects your qualifying activities to the expenses associated with them and calculates the credit your startup can claim.
It also creates documentation supporting the calculation if the credit is ever questioned.
The federal R&D credit is generally calculated and claimed using Form 6765, Credit for Increasing Research Activities.
If an eligible startup elects to use the credit against payroll taxes, Form 8974 is used to apply the credit against eligible payroll taxes.
For tax years beginning after 2025, additional business-component information is required on Form 6765 for many taxpayers, subject to applicable exceptions.
You don't need to know the tax code inside and out to save money on your startup's taxes.
You just need to know what to look for and what questions to ask.
For many technology startups, the R&D tax credit is a particularly valuable place to look. But a good startup tax strategy considers the whole business—not just one credit.
The earlier you identify the opportunities available to you, the more of your company's cash you can keep working for the business.
Fondo helps startups identify qualifying R&D, calculate and claim the R&D tax credit, and coordinate it with their broader corporate tax and accounting work.
Potential opportunities include the federal R&D tax credit, state R&D credits, certain hiring-related credits, clean-energy incentives, and state or local programs. Eligibility depends on your company's activities, employees, location, and industry.
Yes, potentially. An eligible qualified small business may elect to use up to $500,000 of its federal R&D credit against certain employer payroll taxes.
Depending on the circumstances, qualifying expenses can include wages for employees performing qualified research, certain contract research expenses, and certain supplies used in the research. Your total engineering or product-development spend does not automatically qualify.
Yes, provided the underlying development activities meet the requirements for qualified research.
Potentially. Founder compensation may qualify when the founder is performing qualified research and the compensation meets the applicable requirements.
No. Section 174A governs the tax treatment of qualifying domestic R&D expenses. The R&D tax credit is a separate incentive that can provide an additional tax benefit.
Start with what your company does, where you operate, who you hire, and where you're spending money. Your tax team can then evaluate which federal, state, and local incentives may apply.
This guide is for informational purposes only and does not constitute legal, tax, or accounting advice. Tax rules and eligibility requirements can change, and the application of these rules depends on the specific facts and circumstances of your business. Consult your tax advisor or other qualified professional before making tax decisions or filing a tax return.
See What Your Startup May Qualify For
This guide for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.
David is the CEO & Founder of Fondo (YC W18). He is an angel investor in Rippling, Flexport, LiquidDeath, and 100+ other startups. David began his career as an accountant at Deloitte before learning to code and becoming a founder. Previously, he was co-founder of Hackbright where 1,000+ software engineers have been trained and placed at tech companies including Slack, Disney, and Uber and was acquired by Capella Education NASDAQ: $CPLA in 2016.
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