After years of uncertainty and missed opportunities, the landscape for research and development (R&D) tax credits has shifted dramatically and favorably for architecture and engineering firms. The passage of the One Big Beautiful Bill Act (OBBBA) allows domestic research expenses to be immediately deducted under Section 174, removing the previous 5–15-year amortization requirement. This change reopens the door to claiming both accelerated deductions and the R&D tax credit, potentially unlocking 14%–20% in federal tax savings on qualified wages, supplies, and contractor costs.
Why Architects and Engineers Have Struggled to Claim the Credit
Under IRC §41, the R&D credit applies to activities that meet four key criteria:
- The research must be technological in nature
- Intended to develop or improve a business component
- Undertaken to resolve technical uncertainty
- Involve a process of experimentation, such as modeling, simulating, or testing alternatives
While A&E firms often engage in technically rigorous design work, many projects falls short due to:
- Funded research exclusions (i.e., the client bears the risk, not the firm)
- Lack of documentation showing true technical uncertainty
- Vague time-tracking that fails the “process of experimentation” threshold
What Recent Court Cases Teach Us
- Meyer, Borgman & Johnson (2024)
A structural engineering firm’s R&D credit was denied because their fixed-price contracts lacked terms making payment contingent on the success of the research. The courts ruled that even though engineering was involved, the firm did not bear financial risk for the research a key disqualifier under IRS rules.
Key takeaway: Standard professional service contracts rarely meet the “unfunded” test unless they explicitly tie payment to research outcomes.
- Phoenix Design Group (2024)
This MEP (mechanical, electrical, plumbing) firm attempted to claim credits for over 200 projects but failed to demonstrate that its work involved a process of experimentation. Time entries such as “design” or “coordination” weren’t sufficient.
Key takeaway: The IRS and courts are looking for specific evidence of testing alternatives, quantitative comparisons, and engineering analysis not just compliance with building codes.
A Positive Shift: The Smith Case & OBBBA
In late 2024, the Tax Court refused to dismiss an R&D claim by Adrian Smith + Gordon Gill (AS+GG), one of the world’s top architectural firms. AS+GG argued their projects including the Kingdom Tower and Masdar Headquarters retained sufficient risk, included IP rights, and involved rigorous design experimentation.
While not yet fully resolved, the case signals a more nuanced view of architectural R&D, especially when properly documented.
Coupled with the repeal of R&D amortization for domestic costs under OBBBA, A&E firms now have an opportunity to:
- Deduct innovation costs immediately (Section 174)
- Claim up to 20% back in tax credits
- Amend prior-year returns for additional refunds, especially for small businesses with <$31M in average revenue
How A&E Firms Can Qualify in 2025 and Beyond
Success hinges on alignment with IRS expectations and robust documentation. Here are five key strategies:
Draft Contracts Carefully
Include language that ties payment milestones to the success of specific technical deliverables, not just project completion. Consider clauses that:
- Reserve intellectual property rights
- Require client acceptance of technical benchmarks
- Offer refund provisions based on research outcomes
Identify and Substantiate Uncertainties
Before launching into design, document the unknowns: e.g., HVAC integration in a novel structure, material tolerances, or energy-efficiency targets. Describe why a standard solution won’t work, and what must be explored.
Use the Scientific Method
The IRS expects to see hypotheses, testing of multiple alternatives, and evaluation of results. Examples:
- Comparing ducting systems for airflow,
- Modeling energy load for alternative façade materials
- Simulating vibration response in structural supports.
Track Activities with Precision
Replace vague time logs with activity-based descriptors:
- “Simulated geothermal loop sizing”
- “Tested diffuser layout options in OR”
- “Iterative BIM modeling for structural fatigue”
Use time-tracking tools or project management software that allows activity tagging.
Shrink Back When Needed
If an entire project doesn’t qualify, focus on specific subsystems (e.g., mechanical exhaust redesigns, custom curtainwall assemblies) and isolate those costs.
The Bottom Line
The restoration of immediate expensing under Section 174, paired with the evolving court landscape, creates a renewed window of opportunity for architects and engineers to benefit from the R&D tax credit. Success requires planning, contract structuring, and detailed documentation. Firms that can demonstrate how their innovation solves technical problems not just meets code or client specs may finally access the credit they’ve long been denied.
Next Steps
If your firm has undertaken any technically complex projects in the last 3 years, whether in structural design, mechanical systems, or energy modeling, you may be eligible for significant tax savings or refunds. Consider:
- Reviewing project eligibility
- Evaluating contract language
- Structuring your substantiation process
- Filing or amending claims under the latest IRS guidance
Why Work with Engineered Tax Services (ETS)
At Engineered Tax Services (ETS), we’ve spent over two decades helping businesses maximize federal and state tax incentives. We focus particularly on specialty areas like the R&D tax credit, Section 174 deductions, and IRS-compliant substantiation.
Our team comprises licensed tax attorneys, former IRS agents, and seasoned R&D technical experts who specialize in working with architecture, engineering, construction, and design firms. We don’t just skim the surface. We dive deep into every qualifying cost from engineering wages to subcontractor time and design system iterations, ensuring that every dollar claimed meets the IRS’s strict requirements.
ETS is known for:
- Thorough, audit-ready documentation,
- Project-by-project evaluations aligned with court-tested criteria,
- And a white-glove process that provides peace of mind even under the closest IRS scrutiny.
Whether you’re looking to amend prior-year returns, opt into retroactive expensing under OBBBA, or build a defensible R&D program moving forward, ETS offers the strategic insight and technical precision that leading A&E firms trust.
Interested in seeing how much you can save? Find out in under 5 minutes with a free estimate.
Sources and Validated References:
- IRC §41 and §174 [IRS.gov]
- Regs. §1.41-4, §1.174-2
- Meyer, Borgman & Johnson, 100 F.4th 986 (8th Cir. 2024)
- Phoenix Design Group, T.C. Memo. 2024-113
- Smith v. Commissioner, T.C. Nos. 13382-17 et al.
- OBBBA (H.R.1, P.L. 119-21), Sec. 70302 (enacted 2025)
- Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)
