Industry guides
Startup taxes: R&D credit and payroll offset, NOL carryforwards, SR&ED in Canada and bookkeeping
The tax rules that matter most to an early-stage startup: Form 6765 and the $500,000 payroll tax election on Form 8974, how unused research credits carry back and forward, the 80% NOL limit, C corporation deadlines, and Canada's SR&ED credit at 15% or 35% with its 18-month deadline.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
A US startup claims the research credit on IRS Form 6765, and a qualified small business can elect to use up to $500,000 of it against payroll taxes, claimed quarterly on Form 8974. Unused research credit is carried back one year and then forward 20 years. In Canada, SR&ED credits are claimed on Form T661, generally within 18 months of a corporation's year end, at 15% or an enhanced 35% for CCPCs.
Taxes for a startup
Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month. The flat price covers every federal and state or provincial business return the company needs for the year, including Form 1120 in the US and the T2 in Canada.
Most startups lose money early, so the tax questions are less about this year's bill and more about what carries forward: research credits, losses and the payroll offset that turns a credit into cash before the company is profitable.
The research credit: Form 6765
Form 6765 is used to figure and claim the credit for increasing research activities, elect the reduced credit under section 280C, and elect and figure the payroll tax credit. The IRS issued a clarification to the January 2025 instructions on qualified research expenses and group reporting on June 18, 2025.
Since tax year 2006 the research credit can be claimed only as a general business credit, carried to Form 3800, where the allowable credit is figured.
The payroll tax election for small businesses
A qualified small business may elect to use part of its research credit against payroll taxes. The Inflation Reduction Act raised the election amount from $250,000 to $500,000 for tax years beginning after December 31, 2022.
The election must be made on or before the due date of the original income tax return, including extensions, and the amount is set on Form 6765. The payroll portion is allowed starting in the first calendar quarter beginning after the business files its income tax return, and it's claimed on Form 8974 with the employment tax return.
What happens to unused credits and losses
Unused research credit must be carried back one year first. The carryback is mandatory under IRC 39(a) and can't be waived. The credit can then be carried forward 20 years. Credits on Form 3800 are used first in, first out: carryforwards to the year (earliest first), then the year's own credit, then any carryback.
Net operating losses generally can't be carried back anymore, except farming losses and non-life insurance companies, but can be carried forward indefinitely. For losses from tax years beginning after December 31, 2017, deducted in tax years beginning in 2021 or later, the NOL deduction is limited to 80% of taxable income.
For non-corporate businesses, the excess business loss limit on Form 461 applies for tax years beginning after 2020 and before 2029, and a disallowed loss becomes an NOL carryforward. A corporation deducts capital losses only up to capital gains, carrying unused losses back three years and forward five.
Getting a carryback refund
A C corporation can file Form 1139 for a quick refund from carrying back unused general business credits or a net capital loss. Form 1139 and Form 1045 must be filed within one year from the end of the loss or credit year. The IRS has 90 days to process them and tries to refund within 45 days.
A carryback claimed on an amended return, such as Form 1120-X, generally has to be filed within 3 years after the due date of the return, including extensions, for the year of the loss or unused credit.
C corporation filing deadline
Form 1120 is due on or before the 15th day of the fourth month after the C corporation's tax year ends. That same deadline, with extensions, is the last day to make the payroll tax election on Form 6765.
Canada: the SR&ED tax incentive
SR&ED investment tax credits are earned at a basic rate of 15%. For tax years beginning after December 15, 2024, Canadian-controlled private corporations and eligible Canadian public corporations can earn an enhanced 35% rate on qualified expenditures up to $6 million (it was $3 million for CCPCs before December 16, 2024). For CCPCs, that limit starts to shrink at $15 million of taxable capital used in Canada in the previous year and is nil at $75 million.
The claim is made on Form T661 and, for corporations, Schedule T2SCH31. The SR&ED reporting deadline is 12 months after the return's filing due date, which for corporations is generally 18 months after the tax year end. The enhanced rate and refundability are two advantages for CCPCs. Credits left at year end can be carried back or forward under the CRA's rules.
Bookkeeping that supports the credits
Research credits depend on records: which wages, contractors and supplies went into qualified research. Tagging those costs in the books every month makes Form 6765 or T661 a summary, not a reconstruction.
Aldro's bookkeeping at $20 a month covers unlimited bank and card accounts, monthly reconciliation and statements. Payroll processing and sales-tax filing aren't included. Our team prepares and files the year's returns.
Worked example
A calendar-year startup that qualifies as a small business earns a $120,000 research credit for 2026 but has no income tax. On Form 6765, filed with its Form 1120 by the original due date or extension, it elects to apply the credit to payroll taxes, up to the $500,000 limit. The offset starts in the first calendar quarter after it files the return, claimed on Form 8974 with Form 941. Had it not elected, the unused credit would go back one year and then forward up to 20 years.
Common questions
What form does a startup use for the R&D credit?
Form 6765, which also makes the section 280C election and the payroll tax election. The credit then flows to Form 3800.
How much of the research credit can go against payroll taxes?
Up to $500,000 for tax years beginning after December 31, 2022, for a qualified small business, claimed on Form 8974.
What happens to an unused research credit?
It's carried back one year, which is mandatory, then forward 20 years.
Can a startup carry back its losses?
Generally no. NOLs carry forward indefinitely, limited to 80% of taxable income in the year used.
When is the SR&ED claim due in Canada?
Generally 18 months after a corporation's tax year end, which is 12 months after the T2 filing due date.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 USD a year, and it covers everything tax for that year.
How it works
- Tell us about your business. A two-minute form. No payment is collected through it.
- Get your next steps by email. We’ll email you the next steps within one business day. After you sign up we’ll send you a secure upload link for your documents.
- We file it. Our team prepares and files your return. Add bookkeeping for $20 a month if you want it.
What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
- Your personal return. The owner’s personal return (1040 or T1) is included when it’s needed for the business income.
- Quebec. Quebec returns (CO-17, TP-1 and TP-80) are included. Our Quebec pages are in French, and our team works with you in English.
- Extensions and reminders. Extensions (Form 7004 or 4868) and quarterly estimate reminders are included.
- Information returns. 1099-NEC, T4/T4A and T5018 slips are included in the tax price.
- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
- Franchise tax reports. State franchise tax reports, such as the Texas franchise tax report, are included.
- Estimated tax and instalment amounts. We work out your quarterly estimated tax payments in the US, or your CRA instalments in Canada, and tell you what to pay and when.
- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
- Bookkeeping at $20 a month. Unlimited bank and card accounts, monthly reconciliation and monthly statements.
Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. Prices are in USD. Our team prepares and files your return.
Sources
- IRS: About Form 6765 · checked October 31, 2026
- IRS: IRM 21.5.9, Carrybacks · checked October 31, 2026
- IRS: Instructions for Form 8974 · checked October 31, 2026
- IRS: About Form 8974 · checked October 31, 2026
- CRA: SR&ED investment tax credit policy · checked October 31, 2026
- CRA: SR&ED filing requirements policy · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.