Taxes and accounting for SaaS and software startups

From 2022 through 2024, the Tax Cuts and Jobs Act made businesses capitalize research and experimental (R&E) costs. Domestic costs were amortized over 5 years and foreign costs over 15 years. Software development counted as R&E. Many startups owed tax even with little or no cash profit.

The One Big Beautiful Bill Act (P.L. 119-21) added IRC § 174A. The rules now are:

• Domestic R&E paid or incurred in tax years beginning after December 31, 2024 is deductible right away. You can instead elect to capitalize it and amortize it over at least 60 months.
• Foreign R&E is still capitalized and amortized over 15 years under § 174.
• Unamortized 2022 to 2024 domestic costs can be deducted in full in your first tax year beginning after December 31, 2024, or spread over two years.
• Small business retroactive election. Businesses with average annual gross receipts of $31 million or less could apply § 174A back to 2022. Under Rev. Proc. 2025-28, amended returns for this election were due by July 6, 2026, or earlier if the refund statute closed first. If you missed it, ask a CPA what options remain.

States do not all follow the federal rule. Check your state’s conformity before you file.

The research credit under IRC § 41 is claimed on Form 6765. Qualified wages, supplies and contract research for developing new or improved software can count, if the work meets the four-part test.

Most startups have no income tax to offset. A qualified small business can elect to apply part of the credit against payroll taxes instead:

• Gross receipts under $5 million for the year, and no gross receipts before the five-year period ending with that year.
• Up to $500,000 a year for tax years beginning after December 31, 2022.
• The first $250,000 per quarter offsets the employer share of Social Security tax. Any excess offsets the employer share of Medicare tax.
• Elect on Form 6765 with a timely filed original return. An amended return cannot make the election.
• Claim it on Form 8974 with your Form 941, starting with the first quarter that begins after you file the income tax return.

Under the new rules, you generally reduce your § 174A deduction by the credit or elect a reduced credit. Plan both together.

C corporation. Pays a flat 21% federal corporate tax. It is the usual structure for venture-backed startups, and only C corporation stock can qualify for QSBS. Many founders incorporate in Delaware, then register as a foreign corporation in the state where they work.

LLC. Profits and losses pass through to the owners. That can work well for a profitable, bootstrapped SaaS business. Converting to a C corporation later is possible but takes planning. See LLC vs S corp if you are weighing an S election.

QSBS (IRC § 1202). For stock acquired after July 4, 2025, Section 1202 excludes 50% of the gain after three years, 75% after four years and 100% after five years. The per-issuer cap is $15 million, or 10 times your basis if greater. The corporation’s gross assets must be $75 million or less when the stock is issued. Stock acquired earlier keeps the old five-year, $10 million rules. The company must be a domestic C corporation in a qualified trade or business.

ASC 606. Under the FASB revenue standard, ASC 606, you recognize subscription revenue as you deliver the service. An annual plan paid upfront goes on the balance sheet as deferred revenue and moves to revenue each month. Setup or implementation fees are often recognized over the contract too. Investors, lenders and auditors expect GAAP revenue, not cash collected.

Tax timing. Accrual-method businesses can often defer advance payments for up to one year under IRC § 451(c). Book and tax revenue can differ, so track both.

Remote employees. An employee working from another state generally means you must withhold that state’s income tax and register for unemployment insurance there. It can also create corporate income tax nexus and sales tax nexus. The federal protection in P.L. 86-272 (15 U.S.C. § 381) covers only solicitation of orders for tangible goods, so it does not shield a SaaS company. See multi-state nexus and SaaS sales tax.

Best for: pre-seed to growth-stage SaaS and software companies that want their books, R&D credit and state filings handled together.

1. Free initial consultation. Share your entity, funding stage, team locations and current books.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter.
3. Year review. We look at § 174A treatment, R&D credit eligibility and state registrations.
4. Books on GAAP. Monthly accrual books with deferred revenue through our startup accounting service.
5. Returns and planning. We prepare your returns and Form 6765, and plan ahead with tax planning.