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Imagine you’ve just finished a big project that’s sure to boost your business for years to come. You’re excited to see how it impacts your bottom line. But when tax season rolls around, you discover that qualified research expenditures can’t help you right away. Instead of getting a check in the mail or a smaller tax bill, you learn that you’ll have to wait years to realize these benefits. That’s the reality of R&D credit carryforwards. But it doesn’t have to be this way. In this article, we’ll break down R&D credit carryforwards, how they relate to R&D capitalization, and how to use them to your advantage.
Haven’s accounting services for small businesses can help you sort through R&D tax credits and carryforwards to ensure you get the maximum benefit for your company.
Table of Contents
Statute of Limitations and State-Level Carryforward Provisions
Was the R&D Tax Credit Carryforward Affected by the Tax Cuts and Jobs Act?
What is R&D Credit Carryforward?
R&D credit carryforward refers to the ability of a business to apply unused research and development tax credits to future tax years. If your company has research expenses (QREs) that generate a tax credit larger than your current tax liability, the unused portion doesn’t go to waste. It can be carried forward and used later when your business is more profitable.
For example, a startup might invest heavily in product development but not yet be generating enough revenue to owe substantial taxes. In that case, the R&D credit can be stored and applied in a future year when profits (and tax bills) are higher.
Save Excess R&D Credits for Future Tax Relief
Similarly, even if your business was profitable, the credit might exceed what you owe in taxes for that year. Instead of losing that excess, the carryforward provision allows you to save it, potentially up to 20 years, depending on the rules that apply.
This is a valuable mechanism, especially for high-growth or early-stage companies, as it helps turn today’s R&D investments into tomorrow’s tax savings.
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How Does R&D Credit Carryforward Work?
R&D credit carryforward allows businesses to use unused portions of their research and development tax credits in future tax years when they have sufficient tax liability to apply them. This is especially useful for startups or companies in growth phases that invest heavily in R&D but don’t yet generate enough income to use the full credit immediately.
How to Claim and Carry Forward R&D Tax Credits
To take advantage of the carryforward, businesses must first conduct a thorough R&D tax credit study to identify and document qualified research expenses accurately. Once complete, the credit is claimed by filing IRS Form 6765, Credit for Increasing Research Activities. If the full amount of the credit can’t be applied in the year it was earned due to insufficient tax liability, the credit may first be carried back one year. If it still isn’t fully used, the remaining credit can be carried forward for up to 20 years.
Plan R&D Credit Use
Properly planning around carryforwards requires assessing both past and projected tax liabilities. Companies should work with tax professionals to understand when and how to apply the credits for maximum benefit, especially in years where other offsets like net operating losses or tax deductions may affect the credit’s impact. Tracking these credits over time enables businesses to reduce their tax burden as they become profitable strategically.
Statute of Limitations and State-Level Carryforward Provisions
Founders often miss a critical detail regarding the statute of limitations and R&D tax credits. Sure, the IRS has three years to audit your return. But that clock doesn’t start when you earn the credit; it begins when you use it. Say you generate R&D tax credits in 2024 but don’t apply them until 2027. The IRS can audit those credits starting in 2027, and under normal circumstances, they have three years from the date you file to do so. That means your 2024 R&D work could come under review in 2030.
But There’s More
If the IRS believes there’s fraud or a substantial understatement of income, the audit window can extend to six years, or even indefinitely in cases of intentional misrepresentation. That’s why keeping thorough records of your R&D activities, time tracking, project notes, and expense logs is non-negotiable. You don’t want to scramble for documentation years after the work was done.
State-Level Carryforward Provisions: It Varies. A Lot
At the federal level, you can carry forward unused R&D credits for up to 20 years. But states play by their own rules, and those rules can make a big difference in how you plan your tax strategy, especially if you're pre-revenue or not yet profitable. Here are a few real-world examples:
California allows for the indefinite carryforward of unused R&D credits. That’s a massive win for startups expecting long product timelines.
Texas mirrors the federal 20-year carryforward rule.
New York caps carryforward at 10 years.
Massachusetts allows carryforward for 15 years.
Some states don’t offer a carryforward at all, or they limit how the credit can be used (e.g., only against certain types of taxes).
Why It Matters for Founders
If you're planning to monetize R&D tax credits, expand into new states, or eventually sell or go IPO, these provisions affect:
When can you use credits
How long can you retain them
What kind of documentation do you need to maintain
More importantly, poor planning could mean leaving valuable credits on the table, or worse, facing audits and penalties down the line.
The Smart Move?
Work with a tax advisor who understands both federal and state R&D credit rules. They’ll help you align credit use with your growth timeline and keep you audit-ready in the process.
Let Haven Handle the Numbers While You Build
Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings and R&D credits that put cash back in your pocket, as well as fractional CFO services. Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses. Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.
Was the R&D Tax Credit Carryforward Affected by the Tax Cuts and Jobs Act?
The R&D tax credit carryforward allows businesses to apply unused research and development tax credits to their tax liabilities for up to 20 years. Suppose a company cannot fully utilize the credit in the year it is awarded, such as when it has low tax liability or operating losses. In that case, it can apply the credit to future tax returns to reduce its liability in profitable years. The Tax Cuts and Jobs Act did not change the 20-year carryforward period itself.
What Changed for R&D Tax Credit Carryforwards Under the TCJA?
The TCJA altered the application of R&D tax credits, particularly for C corporations. Here are three significant changes:
1. Elimination of the Alternative Minimum Tax (AMT) for C-Corps
Before the TCJA, the alternative minimum tax could limit how much of your R&D credit you could use. Now, with AMT eliminated for corporations, C corporations can more easily apply the full R&D credit against regular tax liability, making carryforward credits more usable.
2. Interaction with the 80% Net Operating Loss (NOL) Limitation
The TCJA limited the use of NOLs to offset only 80% of taxable income (for losses incurred in tax years after December 31, 2017). That means if a corporation is relying on NOLs to reduce taxes, they may still have some tax left over, and that’s where R&D credits can now play a bigger role in closing the gap. This makes R&D credits more valuable, particularly for high-growth tech and SaaS startups with significant net operating losses.
3. The 25/25 Limitation (for Large C-Corps)
C corporations with more than $25,000 in regular tax liability are subject to the 25/25 rule, which says only 25% of the tax liability above $25,000 can be offset by general business credits (which include the R&D credit). This can limit the amount of R&D credit you can apply in a given year, forcing the rest to be carried forward.
Additional Limitations to R&D Tax Credit Carryforwards
Several limitations can affect how much of your R&D tax credit you can utilize in a given year, even after the TCJA. For instance, IRC Section 38(c) limits how much of your tax liability can be offset using general business credits. So, while you can carry credits forward, you may not be able to use all of them at once, depending on your tax profile.
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Supporting Documentation for the R&D Tax Credit
When it comes to the R&D tax credit carryforward, you need supporting documentation. Similar to other tax credits available to businesses, the IRS requires documentation for the R&D tax credit carryforward. According to the IRS, taxpaying businesses must retain records in a sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit. Failure to provide such information may result in the credit being rescinded.
Examples of Documentation Needed for the R&D Tax Credit Carryforward
Documentation required to file for the R&D tax credit includes:
W-2s
1099s
Payroll registers
Time-tracking data
Invoices and receipts for qualified supplies
Job descriptions
Service contracts
Breakdown of qualified vs. non-qualified expenses
Interview notes for oral testimony
Technical design requirements
Prototype documents
Test plans/results
Project schematics
Steps After Collecting R&D Tax Credit Documentation
Once you have all the IRS-required documentation in place, you may claim the R&D tax credit by filing IRS Form 6765 (Credit for Increasing Research Activities).
Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)
Haven specializes in finding and maximizing R&D tax credits for startups. Our services help reduce the financial burden of R&D costs, allowing innovators to focus on creating their products and improving the world. R&D tax credits can be complex, but the Haven team understands the ins and outs and can get you the credits you deserve. Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.
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