Some businesses can qualify for a small business innovation research (SBIR) grant as well as a research and development (R&D) tax credit. There are strict criteria a business must meet to receive both.

Most business owners assume that receiving a grant for R&D funding automatically cuts them off from a federal or state R&D tax credit. This is a common misconception. Innovative businesses can usually take advantage of both of these amazing resources. There are, however, specific rules you must follow to receive an SBIR grant and R&D tax credits. This article will review how you can apply for an R&D tax credit and still qualify for an SBIR grant.

What is an SBIR grant?

Before you try to obtain an SBIR grant, you’ll need to know what it is and how to use it. A U.S. government institution, the Small Business Innovation Research program is overseen by the Small Business Administration. This program helps eligible small businesses pursue more research and development activities. The funding a business receives can come in the form of a contract or a grant. The SBIR program also flows through three distinct phases.

Early phases of the SBIR program serve as a test to determine which applicants are deserving of a grant. Then, later phases distribute funds to businesses deemed eligible. Let’s take a closer look at what happens in each phase:

  • Phase 1. Small business owners must provide evidence that their proposed R&D has technical merit, is feasible, and has commercial potential.
  • Phase 2. Depending upon their performance in Phase 1, business owners could receive additional funding to proceed with R&D.
  • Phase 3. Small businesses can begin to commercialize their R&D activities, although this happens without direct SBIR funding.

As you can see, an SBIR grant can allow you to launch your business to new heights. Now that you know what an SBIR grant is, let’s examine qualities that define a winning applicant.

Who is eligible for an SBIR Grant?

Being innovative isn’t the only feature your small business must possess to receive an SBIR grant. In order to qualify for this grant, your business must:

  • Be for-profit and based in the United States
  • Be owned at least by 50% by U.S. citizens or permanent resident aliens
  • Have no more than 500 employees

If you think you could be a good applicant for this grant, feel free to delve deeper into this program at Having discussed who can qualify for an SBIR grant, it’s time to investigate how a small business owner can win an SBIR grant while applying for an R&D tax credit.

How to Obtain an SBIR Grant and R&D Tax Credit

If you run a small business that’s creating new products, you could get an R&D tax credit and apply for an SBIR grant. First, you’ll need to  prove that your R&D activities prior to receiving your grant weren’t funded. As outlined by IRS Code Section 41(d)(4)(H), funded research is research that is paid for by a government entity, contract, or grant. Essentially, you must prove that you or investors in your business are facing financial risk when conducting your business’ R&D.

Remember, an SBIR grant provides funds for future R&D. An R&D tax credits rewards you for work you have already done. Therefore,  you obtain a credit for your past work while applying for an SBIR grant for your future endeavors.

In order to calculate your tax credit, you’ll need to find the total of the:

  • Fees for U.S.-based 3rd party R&D contractors
  • Salaries of U.S.-based employees conducing R&D
  • Cost of disposable supplies used in R&D activities

Once you have those numbers, enter them into a free R&D tax credit calculator for an estimate of your credit. Of course, if you live in state that has an active R&D tax credit program, your credit could be even larger.

What You Need to Know About the SBIR Grant and R&D Tax Credits

Small businesses across the country could qualify for both an SBIR grant and an R&D tax credit. Timing is crucial though. R&D tax credits can be awarded to businesses that have already spent money on R&D. An SBIR grant provides funds to power future R&D activities. Remember, an R&D tax credit can’t be given to a businesses that has used an SBIR grant to fund R&D as these credits are specifically designed for business owners who have undertaken a financial risk by conducting these activities.

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