By Don Kilam | DK’s Private Business Circle
The tax code PAYS you back for building. This is not a loophole — it is an incentive the IRS WANTS you to claim. Almost nobody claims it. The code says: if you are developing software, improving products, redesigning processes, or building any proprietary method, the government hands money back to you — up to $500,000 a year against employer FICA for small businesses, plus the income-tax credit side with a 20-year carryforward.
Spent your money once — now spend it twice. This is the private-circle walkthrough for business owners who build, test, improve, and solve technical problems. 👑✨
Join the class: DK’s Private Business Circle
Text “TAX CLASS” to 702-200-4900 to learn more.
1. Two Ways to Use the Credit
The federal research credit can provide an income-tax credit. A qualifying small business may also elect to use part of its research credit against employer payroll taxes.
SIDE ONE — THE PAYROLL OFFSET: qualified small businesses (gross receipts under $5 million, no gross receipts in the five years before that) elect up to $500,000 of the R&D credit against the EMPLOYER portion of FICA — the 6.2% Social Security share first, then the 1.45% Medicare share. Form 6765 makes the election. Form 8974 computes the offset and files with Form 941, quarterly. Unused payroll credit carries forward to later quarters.
SIDE TWO — THE INCOME TAX CREDIT: the credit flows through Form 3800 (the General Business Credit), lands on your 1040 via Schedule 3, and any unused credit carries forward for 20 YEARS.
Stack the two sides and the payroll refund plus the income-side credit takes a small business toward the $1,000,000 check over years of qualifying activity. Plus 100% expensing on the assets, plus the retroactive harvest of the prior three years.
You do NOT need income tax liability to use the payroll side. You do not need profit. You need payroll, and qualified activity. That is the whole requirement.
2. The Four-Part Test: Start With the Work
The four-part test applies to each business component being considered for the credit:
- Permitted purpose: The work aims to develop or improve a product, process, software, technique, formula, or invention.
- Technological in nature: The work relies on physical or biological science, engineering, or computer science.
- Elimination of uncertainty: The business is resolving uncertainty about capability, method, or design.
- Process of experimentation: The team evaluates alternatives through modeling, testing, iteration, or trial and error.
YOU ALREADY QUALIFY IF you build software, improve products, redesign internal processes, develop manufacturing techniques, or create any proprietary method. The fact that nobody told you about this credit does not mean you did not earn it.
3. What Counts as Qualified Research Expenses?
Qualified research expenses, or QREs, generally include:
- Wages for employees performing qualified research, directly supervising it, or directly supporting it.
- Supplies used in qualified research.
- CONTRACT RESEARCH — the 65/75/100 rules: time-and-materials contracts count at 65%; funded research counts at 75% where the rights belong to the payor; 100% where you retain substantial rights.
- COMPUTER RENTAL for research use.
NOT COUNTED: advertising, routine quality control, consumer surveys, research after commercial production begins, foreign research.
THE EXAMPLE TRAIL — FROM THE BOOK’S EXHIBITS
Jane Doe Enterprises LLC, the book’s worked example: $1,000,000 of QREs feeds the whole sequence — $640,000 wages + $160,000 supplies + $40,000 computer rental + contract research counted under the 65% rule. These are the exact figures the exhibits run with, form by form.
4. Form 6765: Calculate and Elect
SECTION A — THE REGULAR CREDIT on the fixed-base percentage formula; new businesses generally use 6% of average annual gross receipts.
SECTION B — THE ALTERNATIVE SIMPLIFIED CREDIT: 14% of QREs above 50% of the prior three years’ average QREs. Elect the higher of the two.
THE 280C ELECTION: claiming the credit reduces your QRE deduction by the credit amount — know when keeping the full deduction beats taking the full credit.
In the book’s example: Jane Doe’s QREs compute a $98,000 credit on Section B, reduced under 280C to $77,420.
THE RETROACTIVE PLAY: amend the last three years with Form 1040-X and harvest credits from work you already did and already paid for.
See the IRS Instructions for Form 6765.
5. Forms 8974, 941, and 3800: Follow the Sequence
THE HEART OF THE CHECK. Form 8974 computes the Qualified Small Business Payroll Tax Credit for Increasing Research Activities, filed WITH Form 941 — up to $500,000 per year against the employer share.
In the book’s example: Jane Doe applies $16,600 per quarter against employer FICA ($13,450 Social Security + $3,150 Medicare). On Form 941, line 11a lands the offset — and because deposits exceeded the reduced liability, the quarter closes with $16,651 REFUNDED, the “SEND A REFUND” box checked, and the check issued.
The quarterly cycle is the engine: every quarter — compute the quarter’s credit on Form 8974, carry the amount to Form 941 line 11a, reduce your total tax, and reconcile against deposits. If deposits exceed the reduced liability, the IRS sends the check. Coordinate with your payroll provider: the credit does not change the wages — it changes the liability. Keep the payroll registers, because they are the audit-proof documentation.
FORM 3800 — THE GENERAL BUSINESS CREDIT AND THE 20-YEAR CARRYFORWARD. The R&D credit flows into Form 3800. In the book’s example, Jane Doe’s $77,420 remainder is absorbed against the limitation ceiling and lands on Schedule 3 (Form 1040), line 6g. Whatever the ceiling does not absorb carries forward for 20 years. This is the long game: the credit does not expire this year — it waits.
6. Build the Documentation File While the Work Happens
The records are part of the strategy. Keep them tied to identifiable projects and expenses:
- Project descriptions and technical uncertainty narratives
- Employee time records or a consistent allocation method
- Payroll registers connected to qualified work
- Supply and contract-research invoices
- Testing, design, iteration, and project records
- Business-component expense summaries that reconcile to the tax forms
Project-by-project records. Time tracking or a reasonable allocation methodology. The technical uncertainty narrative for each project. Payroll registers tied to the qualified activities. Invoices for supplies and contract research.
THE AUDIT-PROOF FILE IS THE ASSET. Build it while the work is happening, not after the question arrives.
7. THE STRUCTURE — WHERE THE RESEARCH ACTIVITY LIVES
The R&D credit belongs to the ENTITY that performs the research. In Don’s teaching, that entity is the operating company in the structure stack: operating company → holding company as the single member → the trust above.
This is Play #3 from the Namepreneur teaching: SPEND YOUR MONEY TWICE. The company spends money on development; the credit pays you back. And the structure keeps the credits in the family system.
THE SCALING — EVERY YEAR, FOREVER. The credit is annual. Every year of qualified activity generates a new claim. Year over year, the payroll offsets compound, the carryforwards stack, and the retroactive amendments harvest the past. The cash-flow math: a business with consistent QREs and payroll moves through the sequence the way Jane Doe’s exhibits do — quarter by quarter, refund after refund.
DK’s Private Business Circle connects business education with broader topics such as estate planning services, small business estate planning, estate planning for entrepreneurs, trust and estate planning, and asset protection strategies. Owners also ask about how to protect business assets, business credit repair, and enrolled agent status — the highest credential the IRS awards — as part of building a stronger business foundation.
THE BOOK — COVER LETTER, TEMPLATES & REAL-LIFE EXAMPLES
The full walkthrough is now a BOOK: “R&D Tax Credit: The Secret $1,000,000 Check You Didn’t Know About” — 136 pages from DK’s Private Business Circle.
Inside: a cover letter from Don, 8 fill-in templates (four-part test worksheet, QRE worksheet, 6765 walkthrough, 8974 worksheet, 941 quarter pages, 3800 flow, documentation checklist), AND the real-life examples showing the exact sequence that ends with a client check — Jane Doe Enterprises, $16,651 refunded on Form 941, the “SEND A REFUND” box checked.
Basic, $97: Ebook plus a 15-minute consult.
VIP, $997: 30-minute consult plus a selected play done for you.
THE BOTTOM LINE
The code was written to reward the builder. The four-part test, the QREs, the 6765, the 8974, the 941, the 3800 — you already did the work. Now claim the seat. Get the check.
Join DK’s Private Business Circle: www.skool.com/donkilam/about
Text “TAX CLASS” to 702-200-4900 to learn more.
Prosperity is your divine birthright.
By Don Kilam | DK’s Private Business Circle
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