R&D Tax Credits for Software Startups: US and UK Guide

Short answer: Yes, a software startup can claim R&D tax credits in the US and the UK, but only for work that resolves genuine technical uncertainty, not ordinary feature building. In the US, a young company with under $5 million in gross receipts can use up to $500,000 of credit against payroll taxes, before it is profitable. In the UK, the merged scheme pays a 20% credit, and R&D-intensive loss-makers can claim ERIS instead.

Rates, thresholds and quotes come from official pages checked on 11 Nov 2026; examples and advice are ours. This is not tax advice: talk to an accountant before you file.

TL;DR#

• US credit: 20% of QREs above a base amount, or 14% under the alternative simplified credit (ASC), 6% with no QREs in any one of the prior 3 years (IRS, IRC 41).
• US payroll offset: qualified small businesses can elect up to $500,000 against employer payroll taxes.
• US deduction: domestic research, including software development, is deductible again under section 174A (Rev. Proc. 2025-28).
• UK: 20% merged scheme credit, or ERIS for loss-makers spending at least 30% on R&D (gov.uk).
• What fails: routine bug fixes, cosmetic changes, configuring existing software.

Disclosure: ZeroRaised is a launch site for bootstrapped products. We have no relationship with any R&D tax adviser and earn nothing from this post.

Why R&D credits matter for bootstrapped founders#

Our startup grants guide covers competitive grants. Tax relief is often the more reliable money for software companies: no panel, just eligibility rules and records. Our read: it sits alongside customer revenue and the other ways to fund a product without venture capital. You spend first and claim later, but it can cover a real slice of engineering payroll.

United States: the research credit (IRC 41)#

The four-part test#

The IRS instructions for Form 6765 list the requirements for qualified research, "commonly referred to as the 'four-part test.'" In plain terms, the work must:

1. Qualify under section 174A: be treated as domestic research or experimental expenditure.
2. Be technological in nature: undertaken "for the purpose of discovering information that is technological in nature".
3. Have a permitted purpose: be intended to be useful in "a new or improved business component" that relates to "a new or improved function, performance, or reliability or quality."
4. Be a process of experimentation: "substantially all of the activities of which constitute elements of a process of experimentation."

The test "must be applied separately with respect to each business component", so evaluate each feature or module, not the whole company. Exclusions include "Research conducted after the beginning of commercial production", adapting a product "to a particular customer's need" and "Duplication of an existing product or process."

Internal-use software is harder#

Software you sell or license, or that lets you "interact with third parties", is not internal-use software. Software for "general and administrative functions" is, and must also pass the high threshold of innovation test: innovative, involving "significant economic risk", and not "commercially available for use by the taxpayer" (Form 6765 instructions). Our read: for a SaaS, look at the customer-facing product, not internal admin tools.

What counts as a qualified research expense#

Our read: cloud spend on experiments and test environments is worth raising with your accountant under the computer-use rule. Production hosting for paying customers is a much weaker case.

Credit rates#

The regular credit is "20 percent of the excess" of QREs over a base amount. The ASC is "14 percent of the QREs for the taxable year over 50 percent of the average QREs" for the prior three years (IRS). If you had no QREs in any one of the 3 preceding years, the statute sets the ASC at 6% of current-year QREs (IRC 41(c)(4)(B)). Our read: many young startups will start on that 6% rate.

The payroll tax election for startups#

Without taxable income, an income tax credit puts no cash in your account this year. The qualified small business (QSB) election fixes that. You qualify with "Gross receipts of less than $5 million for the tax year" and "No gross receipts for any tax year before the 5-tax-year period ending with the tax year" (Form 6765 instructions).

According to the IRS QSB page:

• The limit rose "from $250,000 to $500,000 for tax years beginning after December 31, 2022".
• The credit first reduces "the employer's share of social security tax up to $250,000 per quarter", then "any remaining credit reduces the employer's share of Medicare tax for the quarter".
• You elect on Form 6765 with a "timely filed (including extensions) income tax return"; "An election cannot be made with an amended return." Form 8974 sets the amount usable each quarter.

You cannot elect "if an election was made for 5 or more preceding tax years", so do not waste the early years. The catch: you need payroll to offset. Our guide on how to pay yourself as a solo founder covers salary vs draws.

Section 174A: software is deductible again#

From 2022 to 2024, research costs were amortized over 5 years (domestic) or 15 years (foreign). Rev. Proc. 2025-28 explains what the One Big Beautiful Bill Act (4 July 2025) changed:

• Under section 174A, "a deduction is allowed for any domestic research or experimental expenditures", for tax years beginning after 31 December 2024.
• For 174A purposes, "any amount paid or incurred in connection with the development of any software is treated as a research or experimental expenditure."
• Foreign research still must "be amortized ratably over a 15-year period."
• Remaining unamortized 2022 to 2024 domestic costs can be deducted in full in the first tax year beginning after 31 Dec 2024, or over two years.
• The small business retroactive election (section 448(c) gross receipts test) "must be made by Monday, July 6, 2026." That window has closed.

Section 280C(c) reduces your 174A amount by the credit unless you elect a reduced credit, so have your accountant model both.

Form 6765 Section G#

Section G asks for detail on each business component. "For tax years beginning before 2026, Section G will be optional for all filers." From 2026 it is required unless you are a QSB claiming the payroll credit, or have QREs of $1.5 million or less and average gross receipts of $50 million or less on an original return (Form 6765 instructions). Our read: most bootstrapped startups are exempt, but keep component notes anyway. Many states have their own credits too.

United Kingdom: the merged scheme and ERIS#

Which scheme applies#

For accounting periods beginning on or after 1 April 2024, per gov.uk:

• Merged scheme (RDEC): "The rate of R&D expenditure credit under the merged RDEC scheme is 20%." The credit is taxable.
• ERIS: for loss-making SMEs whose "relevant R&D expenditure is at least 30% of its total expenditure." They can "deduct an extra 86% of their qualifying costs" and claim a payable credit "worth up to 14.5% of the surrenderable loss", which "is not liable to tax."
• PAYE cap: payable amounts are capped at "£20,000 plus 300% of the company's relevant PAYE and National Insurance contributions liabilities."
• You "cannot claim under both schemes for the same expenditure", and there are restrictions on overseas expenditure.

What HMRC says about software#

HMRC's software guidance (CIRD81960) says "It does not matter whether the software project is intended to result in a product to be used in-house, licensed or sold." But it excludes configuring existing software "to a company's own requirements", testing focused on "the look and feel of the solution", requirement gathering and deployment, and states: "Maintenance activities or minor fault fixing where no technological uncertainties arise are not R&D."

The underlying test comes from the DSIT guidelines: an advance "in overall knowledge or capability" (not just your company's), and uncertainty that cannot "readily be resolved by a competent professional working in the field." CIRD81900 adds: "Cosmetic and aesthetic qualities are not of themselves science or technology."

Qualifying costs#

HMRC's cost guidance lists staff costs, externally provided workers and contractors (65% of payments to unconnected providers), consumables, software licences, and data licences and cloud computing. Capital expenditure, rent and patents are not claimable.

The paperwork#

• Claim notification: required if "you're claiming for the first time" or your last claim was over 3 years earlier. The window "ends 6 months after the end of the 'period of account'"; miss it and "your R&D tax relief claim will be invalid." But "You do not need to submit a claim notification form for claims made on or after 1 April 2027" (gov.uk).
• Additional information form: needed for each accounting period, "before or on the same day you submit the Company Tax Return." It asks for each project's baseline, advance sought and uncertainties, plus every agent involved (gov.uk).

Worked examples (ours, illustrative)#

US: two-person Delaware C-corp, second year. Both founders take W-2 salaries of $90,000. Time records show 80% of their time on a new query engine with real performance unknowns: $144,000 of wage QREs. A contractor billed $20,000 for experimental work, of which 65% counts: $13,000. Total QREs: $157,000. With no QREs in at least one of the prior 3 years, the ASC is 6%: $9,420. As a QSB, the company elects to use it against the employer share of payroll taxes through Form 8974. The section 280C interaction is left to the accountant.

UK: Ltd company, profitable, merged scheme. Qualifying costs: £100,000 of staff costs plus £10,000 of cloud computing for experiments. Merged scheme credit at 20%: £22,000 gross, before Corporation Tax on the credit.

UK: Ltd company, loss-making, ERIS. Total expenditure £250,000, of which £100,000 is qualifying R&D (40%, above the 30% threshold). The extra 86% deduction adds £86,000 to the trading loss. If £186,000 of loss were surrenderable, 14.5% would give £26,970. The real figure depends on your loss and the PAYE cap.

Decision table (ours)#

Documentation habits that make claims easy#

• Add an rd label to tickets with real technical uncertainty and write one line on what was unknown.
• Keep pull request descriptions that show experiments: approaches tried, benchmarks, failures.
• Log time per business component each week in a spreadsheet.
• Run experiments in a separate cloud project so the costs are easy to isolate.

Choosing an adviser#

Many advisers charge a percentage of the claim, but the risk stays with you. HMRC's overclaim page notes that "Some agents deduct their fees before paying clients the balance of their R&D claim", and says that if you overclaimed "you must include the full amount of overclaimed R&D relief in your offer, not the net amount you received" (gov.uk). Our read: read every narrative before filing, ask how each project was judged eligible, and pick someone who will handle an enquiry.

30-day plan#

• Days 1 to 3: List last year's projects and mark those whose technical outcome was unknown at the start.
• Days 4 to 10: Pull payroll, contractor invoices and cloud bills; estimate time per project from tickets and commits.
• Days 11 to 15: UK: check whether a claim notification is due. US: confirm gross receipts and your first receipts year for the QSB test.
• Days 16 to 25: Draft a one-page narrative per project: baseline, uncertainty, experiments, result.
• Days 26 to 30: Review with an accountant, decide on the claim, and start this year's tagging and time log.

Frequently asked questions#

Can a software startup claim the R&D tax credit with no profit?#

Yes. In the US, a qualified small business (gross receipts under $5 million, none before the 5-tax-year period) can elect up to $500,000 of the credit against employer payroll taxes. In the UK, an R&D-intensive loss-maker (R&D at least 30% of total expenditure) can claim ERIS, with a payable credit worth up to 14.5% of the surrenderable loss.

Does building a SaaS product count as R&D?#

Only the parts that resolve genuine technical uncertainty through experimentation. Features built with well-known techniques, configuring existing tools, cosmetic changes and routine bug fixes do not qualify. The IRS also applies an extra high threshold of innovation test to internal administrative software.

What changed for US software R&D with the One Big Beautiful Bill Act?#

New section 174A lets you deduct domestic research or experimental expenditures paid or incurred in tax years beginning after 31 December 2024, and it treats any amount paid in connection with developing software as a research expenditure. Foreign research must still be amortized over 15 years. The small business election to apply 174A retroactively to tax years beginning after 2021 had to be made by 6 July 2026.

Do I need to tell HMRC before claiming R&D relief?#

If it is your first claim, or your last was more than 3 years earlier, submit a claim notification within 6 months of the end of the period of account, or the claim is invalid. Every claim also needs an additional information form, filed no later than your Company Tax Return. HMRC says notification will not be needed for claims made on or after 1 April 2027.

Should I use a contingency-fee R&D tax adviser?#

It can work, but you stay responsible. HMRC notes that some agents deduct fees before paying clients, yet an overclaim must be repaid in full, not net. Read the technical narrative yourself and prefer an adviser who will defend the claim if queried.

Launch what you built#

ZeroRaised is a launch directory for products built without institutional VC. Once the hard engineering ships, submit your product for free, and join the ZeroRaised newsletter for more funding guides.

Sources#

• IRS: Instructions for Form 6765 (12/2025), last checked 11 Nov 2026
• IRS: Qualified small business payroll tax credit for increasing research activities, last checked 11 Nov 2026
• IRS: Research credit, last checked 11 Nov 2026
• IRS: Rev. Proc. 2025-28, last checked 11 Nov 2026
• 26 U.S. Code § 41 (Cornell LII), last checked 11 Nov 2026
• gov.uk: R&D tax relief, the merged scheme and ERIS, last checked 11 Nov 2026
• gov.uk: Tell HMRC you're planning to claim R&D tax relief, last checked 11 Nov 2026
• gov.uk: Submit detailed information before you claim R&D tax relief, last checked 11 Nov 2026
• gov.uk: Check what R&D costs you can claim, last checked 11 Nov 2026
• gov.uk: Tell HMRC if you've claimed too much R&D tax relief, last checked 11 Nov 2026
• HMRC CIRD81900: Guidelines on the meaning of R&D, last checked 11 Nov 2026
• HMRC CIRD81960: Software, last checked 11 Nov 2026
• DSIT: Guidelines on the meaning of R&D for tax purposes, last checked 11 Nov 2026