R&D Tax Credit for Architecture and Engineering Firms: Qualifying Activities and How to Claim

The R&D tax credit is not just for pharmaceutical companies and software developers. Architecture and engineering firms perform qualifying research activities on nearly every project: evaluating new structural systems, modeling energy performance, developing custom building information models, testing materials for novel applications, and designing for seismic, wind, or flood resistance. The credit is dollar-for-dollar against tax liability (not just a deduction), and for small firms it can offset payroll tax even in years with no income tax liability.

What architecture and engineering activities qualify?

The IRS does not maintain a list of qualifying activities by industry. Instead, each activity is evaluated against the four-part test. For A/E firms, the following activities commonly qualify:

Structural analysis and design: Evaluating structural systems for a building that goes beyond standard practice. If the engineer is analyzing a novel structural configuration, testing load paths through simulation, or developing a custom connection detail, the work involves technological uncertainty and a process of experimentation.

Energy modeling and sustainable design: Performing energy simulations (EnergyPlus, eQUEST, IES VE) to evaluate building envelope options, HVAC configurations, and renewable energy integration. If the goal is to achieve performance targets (LEED, Passive House, net-zero energy) that require evaluating and iterating on design alternatives, the process qualifies.

BIM development: Creating custom Building Information Modeling components, families, or workflows that go beyond standard templates. If the firm develops parametric models, clash detection protocols, or automation scripts for BIM platforms, the development process qualifies. Routine drafting does not.

Seismic and wind design: Designing structures to resist seismic or wind loads in ways that go beyond code-minimum requirements. Performance-based seismic design, base isolation systems, and damping strategies involve significant experimentation.

Materials testing and specification: Evaluating new or alternative materials (cross-laminated timber, high-performance concrete, innovative glazing systems) for a project where the material’s performance in the specific application is uncertain.

Acoustics, lighting, and MEP optimization: When the design involves iterative analysis (computational fluid dynamics for HVAC, daylighting simulation, acoustic modeling) to achieve performance targets, the analytical work qualifies.

What expenses count as Qualified Research Expenses?

QREs fall into three categories:

Wages (typically 65-80% of total QREs): The portion of employee wages allocable to qualifying activities. If an engineer spends 40% of their time on qualifying research activities and earns $150,000, the QRE for that employee is $60,000. The allocation must be supported by time tracking or reasonable estimates.

Supplies (typically 5-15%): Materials and supplies used in the research process that are consumed or destroyed during experimentation. For A/E firms, this includes physical models, material samples, and testing supplies. Software licenses used directly in the research (not general business software) may also qualify.

Contract research (65% of payments): Payments to outside consultants or subcontractors who perform qualifying research on behalf of the firm. Only 65% of the contract research expense counts as a QRE. If the firm pays a structural engineering consultant $50,000 to perform a seismic analysis, $32,500 is the QRE.

How does the payroll tax offset work for small firms?

A qualifying small business (average annual gross receipts of $5 million or less for the four prior years, and no more than five years of gross receipts) can elect to apply up to $500,000 of the R&D credit against payroll tax (the employer’s share of Social Security tax) instead of income tax. This is valuable for startup firms and small practices that have little or no income tax liability.

The election is made on Form 6765 and applied on Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities). The credit offsets payroll tax starting in the quarter after the return is filed.

How does IRC 174A interact with the R&D credit?

The OBBBA restored immediate expensing of research and experimental (R&E) costs under the new IRC 174A, effective for tax years beginning after December 31, 2025. This reverses the five-year capitalization requirement (15 years for foreign research) that had been in effect since 2022 under the amended IRC 174.

For A/E firms, this means that R&E costs (wages, supplies, and contract research allocable to research activities) are immediately deductible in the year incurred. The R&D credit under IRC 41 is calculated on the same costs. The two provisions work together: the deduction reduces taxable income, and the credit reduces tax liability.

Under IRC 280C(c), the taxpayer must reduce the deduction by the amount of the credit (to prevent a double benefit), or elect to take a reduced credit (the deduction stays at full value, and the credit is reduced by the tax effect of the deduction). Most taxpayers elect the reduced credit method, which provides the best combined benefit.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.