Does Your A/E Firm Qualify
for the R&D Tax Credit?
The R&D Tax Credit was written for laboratories and manufacturers. The language — qualified research, process of experimentation, technological uncertainty — sounds nothing like what an architect or engineer does on a typical project day. That framing has kept most A/E firms from ever asking the question. Here's what the IRS four-part test actually requires — and why most A/E firms meet it on almost every project they take on.
The Credit That Was Always Available — and Almost Never Claimed
The Research and Development Tax Credit has existed in some form since 1981. It is one of the most significant tax incentives available to businesses that invest in technical problem-solving. And for most of its existence, architecture and engineering firms have left it unclaimed — not because their work doesn't qualify, but because nobody told them it did.
The credit was designed with a specific mental image in mind: a pharmaceutical company running clinical trials, an aerospace manufacturer testing new propulsion systems, a technology company developing novel software algorithms. Nothing in that image looks like a structural engineer evaluating seismic retrofit options for a school addition, or a mechanical engineer modeling alternative HVAC configurations for a net-zero office building.
But the IRS test that determines eligibility does not ask what the work looks like. It asks what the work does — whether it involves genuine technical uncertainty, a disciplined process of evaluating alternatives, and a reliance on engineering or scientific principles to reach a solution. When that test is applied honestly to A/E work, most firms qualify — and qualify substantially.
The firms that have been claiming the credit for years are not doing any different work than those that haven't. They asked the question, applied the test, and found what was always there.
→ Read: R&D Tax Credit for A/E Firms: The Complete Guide
Check with your CPA; BaseBuilders is not a tax advisor, does not play one on TV, and tax laws are constantly changing.
The R&D Tax Credit does not ask what the work looks like. It asks what the work does — whether it involves genuine technical uncertainty, the evaluation of alternatives, and reliance on engineering or scientific principles.
Most A/E firms meet that test on almost every project they take on.
The IRS Four-Part Test — Applied to A/E Work
The four-part test under IRC Section 41 is the gating requirement for R&D Tax Credit qualification. Every dollar of qualified research expense must satisfy all four parts. Here is what each part requires — and what it looks like in the context of architecture and engineering practice.
Part 1: Technological in Nature
The work must rely on physical, biological, engineering, or computer science principles. It must involve the application of a hard science to a technical problem — not intuition, aesthetic judgment, or professional experience alone.
For A/E firms, this requirement is satisfied at the professional level. Structural engineering relies on physics and materials science. Mechanical engineering relies on thermodynamics and fluid dynamics. Electrical engineering relies on circuit theory and electromagnetic principles. Architecture, to the extent it involves building performance analysis, structural coordination, envelope engineering, or computational design, draws on the same technical foundations.
The part one question for an A/E firm is not whether the work is technological in nature in principle — it clearly is. It is whether specific activities within a project were performed in accordance with technical principles rather than purely aesthetic or administrative judgment. Design decisions driven by structural requirements, energy performance targets, code compliance obligations, or site engineering constraints are technological in nature. Client preference decisions, project schedule management, and fee negotiation are not.
Part 2: Permitted Purpose
The work must be intended to discover information that would be useful in the development of a new or improved business component — a product, process, software, technique, formula, or invention.
For A/E firms, each project is itself a business component — a unique technical solution developed for a specific client, site, and set of conditions. A new building is a new product. An infrastructure system is a new process solution. A building envelope design is a new technical configuration developed for a specific set of performance requirements.
The permitted purpose question is whether the qualifying work was directed toward developing the project-specific solution — not toward administrative tasks, client relations, or activities that don't contribute to the technical outcome. SD and DD work aimed at determining the correct structural system, the right MEP configuration, or the optimal site organization that satisfies the permitted purpose requirement. Marketing the project, managing the client relationship, and coordinating meeting logistics do not.
Part 3: Elimination of Uncertainty
The work must be intended to eliminate technical uncertainty — the firm must not have known at the outset whether the approach would work, whether an alternative would be superior, or what the optimal technical solution was.
This is the part of the test where A/E work qualifies most clearly and where the qualification is most difficult to argue against. The structural system for a complex building has not been determined at the start of schematic design. The mechanical approach that meets energy performance targets within budget is not known at the start of the project. The facade configuration that simultaneously satisfies thermal performance, daylight, and cost requirements requires evaluation.
The uncertainty need not be fundamental scientific uncertainty — uncertainty about basic physical laws. It is sufficient that the firm did not know which technical approach was optimal for this specific project at the start of the work. That condition is satisfied on almost every project an A/E firm takes on.
Part 4: Process of Experimentation
The work must involve a process of experimentation — a systematic evaluation of alternatives, conducted through modeling, testing, simulation, or other technical methods, to determine which approach eliminates the uncertainty.
For A/E firms, experimentation is how design work proceeds in SD and DD. Multiple structural configurations are developed and evaluated. Alternative mechanical approaches are modeled for performance and cost. Site organization options are tested against program requirements and regulatory constraints. The design team iterates toward a solution — developing options, evaluating them against technical criteria, eliminating those that don't work, and refining those that do.
This process does not require laboratory equipment, controlled experiments, or scientific documentation. It requires a disciplined technical evaluation of alternatives — which is exactly what the SD and DD phases of an A/E project are designed to produce.
The uncertainty requirement does not ask whether the laws of physics were in question.
It asks whether the firm knew which technical approach was optimal for this specific project at the start of the work. On most A/E projects, the answer is no, which means the qualification is satisfied before the first line is drawn.
What Disqualifies — and Why the Distinction Matters
Not all A/E work qualifies, and understanding what disqualifies is as important as understanding what does. The IRS has been clear about several categories of work that do not constitute qualified research, and some of them are significant portions of what A/E firms do.
Funded research
If the research is funded by a client under a contract that entitles the client to the results — meaning the client bears the economic risk of the research and owns the findings — the work does not qualify as qualified research for the firm performing it. The A/E firm performing work under a standard owner-architect agreement, where the firm bears the professional risk of the design, generally does qualify. The distinction turns on who bears the technical risk and who owns the results.
Adaptation of existing business components
Work that simply adapts an existing design to a new context without genuine technical uncertainty does not qualify. A firm that has designed the same building type dozens of times and is applying an established design approach to a new project is not performing qualified research — it is applying established knowledge. The work must involve genuine technical uncertainty, not just the application of experience to a familiar problem.
Post-development activities
Once the technical solution has been determined and the design has been substantially resolved, the work shifts from qualified research to documentation, production, and administration. The construction documents phase contains a mix of qualifying and non-qualifying work — technical detailing that requires engineering judgment qualifies; routine sheet production and standard detailing do not. Bidding, CA, and closeout are largely non-qualifying for the reasons described in the phase table.
Management and administrative activities
Project management, staff scheduling, client communication, fee negotiation, marketing, and business development do not qualify as research, regardless of the phase in which they occur. An architect who spends four hours on SD-phase design work and two hours on SD-phase project management and client calls has two hours of qualifying labor and two hours that do not qualify — even though all four hours were logged to the SD phase.
This is why the activity field in time tracking matters as much as the phase. We recommend you provide all recorded labor to your CPA, neatly organized, and let them determine what actually qualifies and what does not. The export from BaseBuilders will save them a ton of time.
→ Read: Qualifying Activities for the R&D Tax Credit in Architecture and Engineering Firms
The Phase and Activity columns in the labor report are the CPA's primary analytical tools.
Phase signals where qualifying work is most likely to have occurred. Activity identifies what kind of work was performed within that phase — and activity is often the more decisive column. A CA hour logged as "Technical Redesign" may qualify. A DD hour logged as "Project Management" does not.
The CPA makes that determination. BaseBuilders makes sure they have the data to make it accurately.
How Much Is the Credit Worth?
The R&D Tax Credit is calculated as a percentage of qualified research expenses — the wages paid to employees for time spent on qualifying activities, plus a portion of contractor costs and supply costs related to qualifying work.
For most A/E firms, the dominant component is qualified research wages—the direct labor cost of hours logged to qualifying phases and activities. The credit rate depends on which calculation method the CPA uses, but a simplified illustration gives a sense of the magnitude:
A firm with 10 professionals averaging $85,000 in annual compensation, spending 40% of their time on qualifying SD and DD activities, has approximately $340,000 in qualified research wages for the year. A credit rate of 14% on incremental qualified research expenses above a base amount could yield a federal credit of $20,000 to $40,000 — depending on the firm's prior-year QRE history and the applicable calculation method.
For larger firms or firms with a higher proportion of qualifying design work, the credit can be substantially larger. For smaller firms or those with lower qualifying percentages, it may be more modest — but the cost of claiming it, once the documentation systems are in place, is low enough that even a modest credit is worth pursuing.
State credits
Many states offer their own R&D tax credits in addition to the federal credit, with varying rates and calculation methods. The combined federal and state benefit can be meaningfully larger than the federal credit alone. The CPA handling the claim will evaluate state credit availability as part of the overall filing.
The startup provision
Firms that have not been profitable for a sufficient period to take the credit against income tax liability may be able to take the credit against payroll tax instead — up to $500,000 per year under the qualified small business election. This provision is significant for younger or rapidly growing firms whose tax liability may not fully absorb the credit.
The cost of not having the documentation
The largest variable in whether the credit is worth pursuing is not the credit rate or the qualifying percentage — it is the cost of generating the documentation. A firm that has to pay its CPA to reconstruct time records, manually separate qualifying from non-qualifying labor, and organize project documentation that doesn't exist in a usable format is spending a portion of the credit value to generate the documentation that supports it.
A firm with phase-level time tracking, activity tagging, and a configured BaseBuilders labor report template is spending a fraction of that amount. The report runs in minutes. The CPA receives a clean export. The filing proceeds without a reconstruction exercise. The credit is worth more — not because the qualifying percentage changed, but because the cost of claiming it is lower.
→ Read: The R&D Tax Credit Labor Report: What Your CPA Actually Needs from Your A/E Firm
→ Read: A/E Accounting for Architecture and Engineering Firms
→ Read: Time Tracking for Architecture and Engineering Firms
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