R&D tax credits for the construction, architecture and engineering industries

Research and development (R&D) tax credits aren’t just for the technology, pharmaceutical and manufacturing industries. Construction, architectural and engineering firms can qualify, too — oftentimes just through their everyday activities where they continuously develop new and improved designs, concepts and processes. And the more your activities qualify, the higher your tax credit amount could be.

Overview of the R&D tax credit for construction and A&E firms

You may not see what you’re doing on a day-to-day basis as a developmental or design-related activity worthy of the federal or state R&D tax credit, but architects and engineers regularly perform qualifying work without knowing it during design or pre-construction.

R&D tax credits for construction

• Design‑build engineering and integration of structural, mechanical, electrical and plumbing (MEP) systems to develop new or improved functionality, constructability, reliability or system performance where the appropriate design solution is uncertain at project initiation.
• Evaluating and engineering alternative system designs, configurations or installation approaches to resolve technical uncertainties related to load demands, system interactions, spatial constraints, sequencing or constructability.
• Engaging in iterative modeling, simulation, testing and trial‑and‑error methodologies to assess multiple design, material or construction alternatives and identify optimal solutions to technical challenges.
• Engineering building systems to achieve targeted energy‑efficiency or performance thresholds, including the analysis and comparison of alternative materials, assemblies, equipment selections and system layouts where performance outcomes are uncertain.
• Developing and evaluating energy‑efficient materials, components or system integrations through modeling, testing or prototyping to improve thermal performance, energy usage or overall building efficiency beyond standard construction practices.

R&D tax credits for architects

• Engineering and modeling building designs to improve energy efficiency, including evaluating alternative envelope systems, mechanical integrations and thermal performance strategies under varying operational assumptions.
• Developing and evaluating alternative architectural and system design concepts to address complex functional, regulatory, site‑specific or performance‑driven requirements where the optimal design solution is uncertain at project inception.
• Analyzing and determining alternative structural or load‑path design approaches to resolve uncertainties related to capacity, constructability, material behavior or integration with other building systems.
• Designing and testing building systems to achieve Leadership in Energy and Environmental Design or similar high‑performance standards, including iterative evaluation of materials, assemblies and system interactions to meet certification criteria.
• Utilizing advanced computer‑aided design (CAD), building information modeling (BIM) and simulation tools to model, test and iteratively refine architectural and system designs to resolve functional or performance uncertainties.
• Developing and optimizing architectural designs for lighting distribution, acoustical performance or occupant comfort, including the evaluation of alternative geometries, materials and system configurations through modeling and simulation.

R&D tax credits for engineering

• Developing or improving engineering processes, methodologies or tools that enhance the performance, reliability, durability or constructability of systems or components.
• Designing new or improved structural, civil, mechanical, electrical or environmental systems where technical uncertainty exists at project start (e.g., load paths, materials, tolerances, performance thresholds).
• Finite element analysis, computational fluid dynamics and other simulations used to evaluate alternative designs or methods.
• Prototyping, pilot testing or mock‑ups to resolve uncertainty in system capability or design approach.
• Evaluating multiple design alternatives to meet regulatory, performance or site‑specific constraints (e.g., seismic, wind, vibration, corrosion, thermal performance).

Qualifying activities in the construction and A&E industries

While many activities do qualify, there are certain restrictions to be aware of. The R&D credit doesn’t apply to:

• Funded research
• Research performed after a design is commercially produced
• Contracts that guarantee payment for 100% of time and materials
• Duplication of existing components

How you get paid is just as important as what activities you’re performing.

Typically, firms that take on what could be considered riskier projects have more qualifying activities carried out in concept design, schematic design, design development and value engineering phases and therefore receive higher R&D tax credits.

How construction and A&E firms qualify for the R&D tax credit

To qualify for the R&D tax credit, your activities must meet the IRS’s four-part test. For construction and A&E firms, this means the work must go beyond standard practice to solve a specific technical uncertainty.

1. Permitted purpose: The activity must relate to creating a new or improved function, performance, reliability or quality for a business component.
2. Elimination of uncertainty: You must demonstrate that at the start of the project, the capability, method or appropriate design was not readily known.
3. Process of experimentation: You must evaluate one or more alternatives to overcome the uncertainty. This often includes CAD modeling or prototype testing.
4. Technological in nature: The process must rely on the principles of hard science, such as engineering, physics, chemistry or computer science.

Benefits of the R&D tax credit for construction and A&E firms

Unlike a standard deduction, which only reduces your taxable income, the R&D credit provides a dollar-for-dollar reduction in actual tax liability, providing a significant financial advantage. Firms that leverage the credit can see:

• Improved cash flow: Credits can help you recoup qualified research expenses in areas such as wages and supplies, freeing up capital.
• Immediate expensing: Under the One Big Beautiful Bill Act (OBBBA), immediate expensing for domestic R&D has been restored for tax years beginning in 2025. This allows firms to deduct costs in the year they are incurred, reversing the previous five-year amortization requirement and significantly increasing near-term tax savings.
• Reduction of effective tax rate:  When combined with immediate expensing, the R&D credit can materially lower a firm’s effective federal tax rate, improving after‑tax project profitability without requiring changes to core operations.
• Carryforward flexibility: Unused R&D credits may be carried forward up to 20 years, allowing firms with variable profitability cycles to monetize credits as taxable income increases.

How to claim the R&D tax credit for construction and A&E firms

If your firm hasn’t claimed the R&D tax credit historically, you can go back up to the past three tax years and claim the credit (so long as you have qualifying activities for each of those years).

It’s also important to note that there are many states offering an R&D tax credit. Each state has its own calculation and requirements. For example, qualifying activities must be performed in that state.

The good news is, when you identify and claim credits at the federal level, this does not reduce the amount you can receive at the state level — meaning your tax credits are enhanced by claiming credits at both levels.

Overall, the R&D tax credit can be a lucrative incentive for many firms, but it’s also worth having specialists on your side to assist you. The IRS is paying close attention to firms that claim the credits, and there have been several court cases in recent years regarding the credit.

Unlike other tax credits and incentives, the R&D credits are heavily activities-based and require in-depth discussion regarding activities. Working with a business advisor with expertise in the R&D tax credit area can help ensure you are accurately claiming qualified expenditures for qualifying activities.

How Wipfli can help

Wipfli provides support at any stage of your R&D credit journey, from assessing your projects to looking at your contracts to identify terms that would disqualify activities. Contact our credits and incentives team today to see how we can help you maximize your tax opportunities.

Read more:

• How your firm can leverage OBBB tax changes for construction
• What are the key rules for 100% bonus depreciation in 2026?
• The future of energy tax credits