Question 1

Explain Section 174 amortization changes

Accepted Answer

The One Big Beautiful Bill Act (OBBBA) reversed the burdensome TCJA Section 174 rules, allowing businesses to immediately deduct domestic R&D expenses again starting in the 2025 tax year. While domestic research benefits from this immediate write-off, any foreign R&D costs must still be capitalized and amortized over a 15-year period. Furthermore, the new law allows eligible small businesses to retroactively amend their 2022–2024 tax returns to fully expensed previously amortized costs.

Question 2

Form 6765 instructions

Accepted Answer

IRS Form 6765 is used to calculate and claim the Credit for Increasing Research Activities. The major update is the new Section G, which requires detailed reporting of each business component or project. While optional for 2024, Section G becomes mandatory for 2025. Taxpayers must document the project’s objective, activities performed, and technical uncertainties, increasing transparency and improving substantiation for R&D claims.

Question 3

Do I qualify for R&D tax credits if I’m a pre-revenue startup?

Accepted Answer

Yes. Pre-revenue startups can qualify if they meet the Qualified Small Business (QSB) criteria: less than $5 million in gross receipts for the credit year and no gross receipts for any tax year before the previous five years. Eligible startups can apply up to $500,000 of their R&D credit against employer payroll taxes, providing cash flow benefits even without income tax liability.

Question 4

How does Section 174 affect my R&D tax credit claim?

Accepted Answer

Section 174 and Section 41 (R&D credit) operate independently. Section 174 requires amortization of a broad set of indirect research costs, while the R&D credit is calculated using a narrower group of qualified expenses such as wages, supplies, and contractor fees. A company may have a much larger pool of Section 174 expenses to amortize, while only a portion of those expenses will generate the R&D tax credit.

Question 5

What is the R&D payroll tax offset for startups?

Accepted Answer

The R&D payroll tax offset allows early-stage companies to apply their R&D tax credits toward payroll taxes instead of income tax. For tax years beginning after December 31, 2022, the maximum offset is $500,000: the first $250,000 applies to Social Security taxes, and the remaining $250,000 applies to Medicare taxes.

Question 6

IRS Dirty Dozen list: R&D tax credit mills

Accepted Answer

The IRS Dirty Dozen list warns against R&D tax credit mills—promoters who encourage businesses to claim credits for work that does not meet the four-part test. These groups often use contingency fees and provide poor documentation, significantly increasing audit risk. Working with such firms can lead to disallowed credits, penalties, and interest during an IRS audit.

Question 7

List of qualifying R&D activities for software companies

Accepted Answer

Qualifying software R&D activities must satisfy the four-part test. Examples include developing new algorithms, designing innovative architectures, building scalable APIs, and performing iterative testing to eliminate performance uncertainties. Activities that do not qualify include routine maintenance, cosmetic UI changes, and internal-use software without significant innovation.

Question 8

How to calculate the R&D tax credit

Accepted Answer

The credit can be calculated using the Regular Research Credit (RRC) or the Alternative Simplified Credit (ASC). The RRC equals 20% of qualified expenses above a calculated base amount tied to historic financials. The ASC provides 14% of qualified expenses above 50% of the average qualified expenses from the prior three years. If the company has no history, the ASC rate is 6% of current qualified expenses.

Question 9

Can I claim AWS hosting costs as R&D expenses?

Accepted Answer

Standard production hosting costs do not qualify. However, cloud computing costs may qualify as R&D expenses if the resources, such as AWS EC2 instances, are used exclusively for development or testing. To qualify, these costs must be segregated from production hosting and clearly tied to research activities.

Question 10

Can I claim R&D credits if I outsource my development to contractors?

Accepted Answer

Yes, R&D credits may be claimed for work outsourced to US-based contractors, but only 65% of the cost is eligible. The contract must be structured so that you bear the financial risk and retain substantial rights to the resulting intellectual property. Fixed-fee contracts usually do not qualify because the contractor—not the taxpayer—bears the financial risk.

New Mexico inventionINDEX & Innovation Data

Compliance

Services

Swanson Reed - New Mexico Patent of the Month (Creative Work & Dataset)

inventionINDEX

Can You Claim?

New Mexico Hub