Tax Credits for Startups: What a New Company Can Actually Claim

Founders searching for tax credits for startups, or a new business tax credit, find long lists. The honest version is shorter, because a credit is only worth something when there is a tax for it to reduce. Nearly every federal business credit reduces income tax, and a company that has not turned a profit has none. This guide follows the order in which a new company usually meets its credits: before revenue, first hires, first benefits, first retirement plan, and the first profitable year. Tax breaks for new businesses that are deductions rather than credits come last, labeled as such.

The startup credit map

"Income tax" means the company's own tax for a C corporation, or the owners' tax for an LLC or S corporation whose credits pass through to them. Each credit has further conditions below.

Before revenue: why most credits have to wait

Every credit in the map except the payroll election is part of the general business credit in section 38. It is allowed against income tax, subject to a limit, and a company with no income tax uses none of it that year. What goes unused carries back 1 year and forward 20 years under section 39. In a company's first year there is no earlier year to carry back to, so the whole amount waits for a profitable year that may be several years out.

Two more rules shape what a carryforward is worth to a young company:

• Pass-through owners. An LLC taxed as a partnership, or an S corporation, passes its credits to the owners. For the research credit, section 41(g) caps each owner's credit at the tax on that owner's income from the business, so it cannot shelter a founder's salary from another job or a spouse's wages. While the business shows no income, the cap is zero and the credit carries to later years.
• Ownership changes. For a corporation, section 383 limits how much of a pre-change credit carryforward can be used each year after an ownership change. Section 382 defines one as a rise of more than 50 percentage points in the stock owned by 5-percent shareholders over a testing period that is generally 3 years, and issuing stock to investors who become 5-percent shareholders counts toward it.

Before revenue: the one credit that pays now

The R&D payroll election is built for this stage. The IRS describes it as designed to benefit an eligible startup with little or no income tax liability (IRS payroll credit page). A qualified small business, one with under $5 million in gross receipts for the year and no gross receipts before the five-year period ending with that year, can elect up to $500,000 a year of its research credit against the employer share of Social Security tax and then Medicare tax. The offset begins in the first quarter after the election return is filed, and a company can elect for five tax years at most. How BEG handles the study and the election is on the Payroll Credits page.

Two details catch pre-revenue companies. Interest earned on the money in the bank counts as gross receipts for the five-year test, and the election is lost for a year if it is not on the original return filed on time, extensions included. Both are worked through, with scenarios, in the R&D tax credit for small businesses guide. The work must also pass the four-part test explained in R&D tax credit requirements.

First hires: credits tied to who you hire and how you pay

The Work Opportunity Tax Credit is closed to new hires

The Work Opportunity Tax Credit rewarded hiring from targeted groups, such as certain veterans. It does not apply to anyone who begins work after December 31, 2025, under section 51(c)(4), and on March 19, 2026 the IRS posted that Form 8850 is no longer in use. A company making its first hires in 2026 cannot claim it. The 2026 guide to payroll tax credits covers what remains for earlier hires.

Paid family and medical leave (IRC 45S)

This credit needs a written policy first: at least 2 weeks of paid family and medical leave a year for full-time qualifying employees, prorated for part-time staff, paid at 50% or more of normal wages. It then runs from 12.5% to 25% of the leave wages paid, depending on the pay rate, for up to 12 weeks per employee a year, or, by election, of premiums for a paid leave insurance policy. The timing matters for a new team. Under section 45S as amended for tax years beginning after 2025, a qualifying employee must have worked for you at least 1 year, or 6 months if you elect, work 20 or more hours a week, and have earned no more than $96,000 in 2025 for the 2026 credit, per the Form 8994 instructions. Leave taken by someone hired 3 months ago does not count yet.

FICA tip credit for restaurants and salons (IRC 45B)

A new restaurant, bar, salon or barbershop with tipped employees earns this credit from its first tipped payroll: the employer Social Security and Medicare tax paid on tips, minus the tips needed to bring cash wages up to a federal floor. For tax years beginning after 2024 it covers barbering and hair care, nail care, esthetics, and body and spa treatments as well as food and beverage service. The math and Form 8846 are in the FICA tip credit guide.

Disabled access credit (IRC 44)

A business with $1 million or less of gross receipts, or no more than 30 full-time employees, in the prior year can claim 50% of eligible access expenditures above $250 and up to $10,250 a year, so $5,000 at most, on Form 8826 (Rev. September 2017, still the current revision). Eligible costs are reasonable amounts spent to comply with the Americans with Disabilities Act: removing physical or communication barriers, interpreters and readers, and acquiring or modifying equipment. Under section 44(c)(4), barrier removal in a facility first placed in service after November 5, 1990 does not qualify. As an illustration, $8,250 of eligible spending produces a $4,000 credit, and the same $4,000 cannot also be deducted.

Each of these credits is figured from payroll records: hours, wages, tips and leave. BEG Managed Payroll runs payroll inside the system you already use, from $25 per employee per month, so those records exist when a credit is claimed.

First benefits: health coverage and child care

Small employer health insurance credit (IRC 45R)

An employer with no more than 25 full-time equivalent employees and average wages of no more than $68,200 for 2026 (twice the $34,100 amount in Rev. Proc. 2025-32) can claim up to 50% of the premiums it pays for employees' coverage bought through the SHOP Marketplace, if it pays a uniform share of at least 50%. The credit shrinks above 10 full-time equivalents and above $34,100 of average wages; the Form 8941 instructions show how the reduction is figured.

Two rules matter to founders. The credit lasts only 2 consecutive tax years, beginning with the first year the employer offers coverage through an Exchange, so the first year of offering starts the clock whatever the credit is worth that year. And under section 45R(e)(1), self-employed individuals, 2-percent S corporation shareholders, 5-percent owners and their close relatives are not employees for this credit. A company staffed only by its owners has no one to claim it for.

Employer-provided child care credit (IRC 45F)

For amounts paid or incurred after December 31, 2025, this credit is 40% of qualified child care expenditures, or 50% for an eligible small business, plus 10% of child care resource and referral costs, capped at $500,000 a year ($600,000 for an eligible small business). An eligible small business meets the section 448(c) gross receipts test averaged over 5 years instead of 3; for 2026 that threshold is $32 million. Qualified costs include contracting for care with a qualified child care facility or with an intermediary that contracts with facilities, not only building one, per section 45F. Facility credits are recaptured on a sliding scale if the facility stops operating or changes ownership within 10 years. Claimed on Form 8882 (IRS).

First retirement plan: three credits on Form 8881

A company with no more than 100 employees who earned at least $5,000 the year before can claim these when it starts a SEP, a SIMPLE IRA or a qualified plan such as a 401(k), per the IRS startup credit page. The plan needs at least one participant who is not highly compensated, and the credit is off the table if the company, a member of its controlled group or a predecessor kept a plan for substantially the same employees in the 3 prior years.

• Startup costs (IRC 45E). 100% of the ordinary and necessary costs to set up and administer the plan and educate employees about it, or 50% for employers with 51 to 100 employees. The yearly cap is the greater of $500 or $250 for each eligible non-highly compensated employee, up to $5,000, for the first credit year and the 2 years after it. The first credit year can be the year before the plan takes effect, if the employer elects.
• Employer contributions (IRC 45E(f)). Up to $1,000 per employee a year, at 100% of contributions in the first and second plan years, then 75%, 50% and 25%, reduced for employers with more than 50 employees. Employees paid more than $110,000 in 2026 are left out, per Notice 2025-67. Elective deferrals do not count.
• Auto-enrollment (IRC 45T). $500 a year for 3 years, starting with the first year the plan includes an eligible automatic contribution arrangement. New and existing plans both qualify.
• Military spouses (IRC 45AA). $200 for each participating military spouse plus up to $300 of employer contributions, for the year participation starts and the next 2 years.

The company cannot also deduct the $6,000 of costs the credit covers. If it adds automatic enrollment, another $1,500 over the 3 years is possible, and contributions it makes for employees can add up to $1,000 per employee a year on top. All of it is claimed on Form 8881 and, like every credit here, waits for income tax if there is none that year.

First profitable year: using what you carried

When income tax finally shows up, the carried credits start to count, but not dollar for dollar against every dollar of tax. For a corporation, section 38(c)(6)(E) sets the limit: credits can offset net income tax minus 25% of the part of it above $25,000. A C corporation with $100,000 of net income tax can therefore use up to $81,250 of general business credits that year; the rest keeps carrying forward.

Three follow-ups belong in that first profitable year. The research credit keeps applying to income tax after the five-year payroll window closes, as long as the company does qualified research. Sole proprietors and owners of partnerships and S corporations can use the research credit against the alternative minimum tax when both the business and the owner meet a $50 million average receipts test, a rule explained in the small business guide. And if an earlier return skipped the credit, open years can often still be amended; see claiming a missed R&D credit on an amended return. Established companies handle that through Credit Recovery on the Tax Planning page.

Tax breaks for new businesses that are deductions, not credits

A deduction lowers taxable income; a credit lowers the tax itself. These deductions are worth knowing in year one, but none of them is a credit:

• Start-up costs (IRC 195). By election, costs of investigating or creating the business before it opens can be deducted up to $5,000 in the year the business begins, reduced by the amount total start-up costs exceed $50,000, with the rest deducted evenly over 180 months starting with the month the business begins. Research costs are excluded from this bucket because they have their own section. As an illustration, $53,000 of start-up costs gives a $2,000 immediate deduction plus $283.33 for each of the 180 months.
• Organizational costs (IRC 248 and 709). The same $5,000, $50,000 and 180-month rules apply to the costs of forming a corporation, and of organizing a partnership.
• Domestic research costs (IRC 174A). Deductible in the year paid or incurred for tax years beginning after 2024; see the section 174 guide.
• Equipment (IRC 179). See the section 179 deduction guide for the 2026 limits.

Sources: 26 U.S.C. 38; 26 U.S.C. 39; 26 U.S.C. 41; IRS, Qualified small business payroll tax credit for increasing research activities; 26 U.S.C. 382; 26 U.S.C. 383; 26 U.S.C. 44; IRS, Form 8826 (Rev. September 2017); 26 U.S.C. 45S; IRS, Instructions for Form 8994 (Rev. December 2024); 26 U.S.C. 51; IRS, Form 8850 is no longer in use; 26 U.S.C. 45R; IRS, Instructions for Form 8941 (2025); IRS, Rev. Proc. 2025-32; 26 U.S.C. 45F; IRS, About Form 8882; 26 U.S.C. 45E; 26 U.S.C. 45T; 26 U.S.C. 45AA; IRS, Form 8881 (Rev. December 2025); IRS, Retirement plans startup costs tax credit; IRS, Notice 2025-67; 26 U.S.C. 195; 26 U.S.C. 248; 26 U.S.C. 709. Rules and figures checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.