Small Business R&D Credit Jumps to 20%; FUTA Tax Refunds Start in 2026

The new Research and Development Tax Credit Expansion Act of 2025 is essentially a massive upgrade for small businesses trying to innovate. Starting in tax years after December 31, 2025, this bill significantly loosens the rules on who qualifies for the research credit and dramatically boosts the amount of money they can claim, making it much easier for startups to invest in new ideas.

The New Math of Innovation: 20% Credit Rate

If you’re running a qualified small business—and that definition is about to get much broader—the way you calculate your research credit is changing in a big way (Sec. 3). Currently, the alternative simplified credit rate is 14%. This bill boosts that rate to 20 percent for qualified small businesses. Think of it this way: for every $100,000 in qualified research expenses, that’s an extra $6,000 back in your pocket compared to the old system. This is a huge incentive bump for established small firms that have been doing R&D for years.

For brand-new businesses, the deal is even sweeter. If your company had no qualified research expenses before the current tax year, you get to use a 20 percent rate instead of the standard 6 percent when calculating the base portion of your credit. This provision is designed to give true startups—the ones just getting off the ground—a major financial leg up right when they need it most, helping them turn lab ideas into market realities.

Expanding the Definition of “Small Business”

One of the biggest hurdles for growing businesses was hitting the cap on gross receipts too soon. The bill addresses this by relaxing the definition of a “qualified small business” (Sec. 2). Previously, a business couldn't have more than $5 million in gross receipts. This limit is now doubled to $10 million. If you’re a mid-sized tech firm or a growing manufacturing shop, this change means you can keep accessing this crucial credit even as you scale up.

Furthermore, the time frame for looking at those gross receipts is expanding from five years to ten years. This provides more flexibility, especially for companies that might have one or two massive years of revenue but are otherwise still developing. To keep the credit relevant over time, the bill also mandates that the dollar limits related to this credit will be automatically adjusted for inflation starting in 2026, using 2025 as the baseline year, ensuring the credit’s value doesn’t erode.

Cash Flow Boost: Refundable Against FUTA

This is a critical change for cash flow (Sec. 2). For small businesses, the research credit is often used to offset tax liabilities, but sometimes that money isn't immediately useful. This bill makes the portion of the research credit that applies against the Federal Unemployment Tax Act (FUTA) tax refundable.

What does that mean in plain English? FUTA is a payroll tax you pay on your employees. If you’re a small manufacturer with a few employees and you earn a $50,000 research credit, any part of that credit used to offset your FUTA liability can now be claimed as a cash refund instead of just a deduction. This puts cash back in the hands of small employers faster, which they can then immediately reinvest in hiring or, you guessed it, more research.