The federal R&D tax credit under IRC § 41 was not designed only for tech companies. Architecture, engineering, and design firms regularly perform work that qualifies — building system design, structural problem solving, and energy modeling all routinely meet the four-part test. Yet most A/E firms in the Bay Area never claim the credit because their CPA does not specialize in the industry.
- The four-part test (permitted purpose, elimination of uncertainty, process of experimentation, technological in nature) is met by more design work than firms realize.
- Qualified Research Expenses (QREs) include the wages of architects and engineers doing the work, not just lab scientists.
- California has its own R&D credit (R&TC § 23609) that can stack with the federal benefit.
- Documentation is the hard part — contemporaneous time tracking and project descriptions are required to defend the credit on audit.
- Refund claims can go back three open tax years, meaningful for firms that have never claimed the credit.
What qualifying design work looks like
Custom structural analysis for an unusual site. Building envelope optimization for energy code compliance. HVAC design that involves iterative testing. Acoustical modeling for performing arts venues. Foundation design on poor-soil sites. Mechanical-electrical-plumbing coordination that requires problem solving beyond standard practice. All of these regularly qualify under § 41 — assuming the documentation is there to support the claim.
The four-part test, plainly
1. Permitted purpose. The activity must aim to develop or improve a product, process, technique, formula, or invention. For A/E firms, this includes building designs, structural systems, and mechanical systems.
2. Elimination of uncertainty. At the start of the work, the capability, method, or appropriate design must be uncertain — beyond routine application of existing techniques.
3. Process of experimentation. The firm must evaluate alternatives through systematic trial and error, modeling, or simulation.
4. Technological in nature. The work must rely on principles of engineering, physical sciences, biological sciences, or computer science. This is where A/E work straightforwardly qualifies.
What counts as a Qualified Research Expense
QREs include W-2 wages of employees performing qualified research, supplies used in the research, and 65% of contract research expenses paid to outside contractors. For most A/E firms, the wages of architects and engineers performing qualifying design work form the bulk of QREs.
California R&D credit on top
California allows its own R&D credit under R&TC § 23609, with a slightly different calculation. It can stack on top of the federal credit. For Bay Area firms, the combined benefit is often the difference between a credit being meaningful and being marginal.
Frequently Asked Questions
Does our firm size matter for R&D credit eligibility?
No. The R&D credit applies to firms of any size. Smaller firms can also use the payroll tax election (up to $500K per year against payroll tax) which is particularly useful for firms without significant income tax liability.
What documentation do we actually need?
Contemporaneous documentation of qualifying projects — project descriptions, technical challenges encountered, alternatives evaluated, and time tracking by personnel performing qualifying work. Generic time tracking does not work; the time records need to tie to specific qualifying activities.
Can we claim the credit retroactively?
Yes — amended returns can claim the credit for the three prior open tax years. For a firm that has never claimed the credit, this often produces a meaningful one-time benefit alongside the ongoing future credit.
Does residential design work qualify?
Yes, when it meets the four-part test. Custom design that requires structural problem solving, energy modeling, or unusual site adaptation typically qualifies. Standard application of existing residential designs does not.
How much can the credit actually be worth?
The federal credit is roughly 6.5% to 13% of QREs depending on which calculation method is used (regular method vs. alternative simplified credit). California adds its own credit on top. For a firm with $1M in qualifying wages, the combined federal and state credit can easily exceed $100K annually.
Curious whether your firm qualifies?
A 30-minute consultation to review your project mix, assess qualifying activities, and determine whether an R&D credit study would pencil out for your firm. Complimentary.
Active member of the AICPA and CalCPA. Tax strategy and advisory for Bay Area business owners, real estate investors, and high-net-worth families.
This article is for general information and does not constitute tax, legal, or investment advice. Individual situations vary; please consult a CPA before making tax elections. Milestone CPAs is licensed in California and serves clients across the Bay Area and Tri-Valley.
