Why Most A/E Firms Qualify — and Why Most Don't Know It

The R&D Tax Credit was established by Congress to reward companies that invest in technical innovation. The language of the credit — qualified research expenses, process of experimentation, technological uncertainty — was written with laboratories and manufacturers in mind. Nothing in the statutory language sounds like what an architect or engineer does on a Tuesday afternoon.

That framing has kept most A/E firms from ever exploring whether they qualify. It has also cost them, collectively, a significant amount of money that the IRS was prepared to return to them.

Architecture and engineering firms qualify for the R&D Tax Credit because of what the IRS four-part test actually requires — not because of what it sounds like it requires. When the test is applied to A/E work phase by phase, the qualification is not a stretch. It is a straightforward description of how design work happens.

Check with your CPA; BaseBuilders is not a tax advisor, does not play one on TV, and tax laws are constantly changing.

The IRS four-part test:

Technological in nature. The work must rely on physical, biological, engineering, or computer science principles. Architecture and engineering work is definitionally technical — structural analysis, MEP system design, building envelope performance, and site engineering. The technological nature of A/E work is not an argument to be made. It is the premise of the profession.

Intended to eliminate uncertainty. The firm must not have known at the outset whether the approach would work or whether an alternative would be superior. This describes early-phase A/E design precisely. A structural system that satisfies seismic requirements while fitting within an architectural envelope has not been determined at the start of schematic design. The HVAC approach that meets energy performance targets within the mechanical budget is genuinely uncertain when the project begins. The firm is working toward a solution whose technical viability is not yet known.

A process of experimentation. The firm must have evaluated alternatives — modeling options, testing approaches, comparing configurations — to determine which solution worked. A/E firms do this continuously: multiple structural systems evaluated against the program, alternative MEP configurations modeled for energy and cost performance, site drainage approaches tested against regulatory and program requirements. This is not a special research activity. It is how design work proceeds.

Related to a new or improved business component. Every building is a new business component. Every infrastructure project. Every site plan. Each one is a unique technical solution developed for a specific client, site, and set of conditions. This criterion is the most broadly satisfied of the four — and the one that most clearly distinguishes A/E work from routine professional services that apply established methods to known problems.

The work qualifies. It has always qualified. The question is whether the firm has the records to prove it — and whether the records are organized in the format a CPA can use to prepare the credit calculation without a significant additional documentation effort.

Which Phases Qualify — and Which Don't

Not all A/E work qualifies for the R&D Tax Credit. The IRS distinction is between work that involves genuine technical uncertainty and experimentation, and work that applies established knowledge to execute a design that has already been determined. The phase-by-phase logic below reflects how most R&D Tax Credit specialists approach A/E qualification. This table outlines your typical phases and how their work qualifies.

→ Read: Qualifying Activities for the R&D Tax Credit in Architecture and Engineering Firms

The Labor Report — What It Is, What It Contains, and Why It Matters

The R&D Tax Credit documentation package has approximately ten components. Most of them — technical narratives, evidence of experimentation, project contracts, prior-year qualified research expense history, contractor cost records — come from the firm's project files and the CPA's analysis. They require professional judgment and some assembly, but they draw on materials that already exist in the course of running a normal A/E practice.

Item four — the qualified research labor report — is the one that typically doesn't exist in a usable format at tax time. It is also the one where firms most commonly spend billable CPA hours paying their accountant to reconstruct data that should have been available as a standard report.

What the labor report contains:

The labor report is a structured export with seven typical columns:

Staff — the employee who performed the qualifying work. The credit is calculated on qualified research wages — compensation paid to employees for qualified research activities. The labor report must identify who performed the work, not just that the work was performed.

Date — when the work was performed. The IRS requires that qualified research expenses be tied to specific tax years. Date-level granularity in the labor report eliminates ambiguity about which year the work falls in — relevant for projects that span calendar years.

Project — which project the work was charged to. The credit calculation is performed at the business component level — meaning the CPA needs to be able to associate qualifying labor with specific projects and demonstrate that each project involved qualified research as defined by the four-part test.

Phase — which project phase the work was charged to. This is a column that helps determine qualification. Time charged to SD and DD phases is a strong candidate for qualification. Time charged to CA and Bidding is not so strong. Phase-level time tracking is the prerequisite for this column to contain useful data.

Activity — the type of work was performed within the phase. Design, modeling, structural analysis, energy calculation, coordination — activity-level tracking within phases gives the CPA the granularity to allocate qualifying versus non-qualifying labor within a phase and to defend the allocation if the credit is audited. This could be the most important column in determining what qualifies

Hours — the time logged. The foundation of the qualified research wage calculation. Hours multiplied by the employee's wage rate produce the qualified research expense to which the credit percentage is applied.

Direct Labor — the dollar value of those hours at the employee's direct labor rate. Configured in BaseBuilders against each employee's compensation, this column converts the hour count into the wage expense figure the CPA needs for the credit calculation without requiring a separate payroll reconciliation.

Every column in that export comes from data already in BaseBuilders as a normal byproduct of running the project — provided the firm has activities properly configured, and has direct labor rates set for each employee.

→ Read: The R&D Tax Credit Labor Report: What Your CPA Actually Needs from Your A/E Firm

How BaseBuilders Generates the Labor Report

BaseBuilders generates the R&D labor report as a configured export from the time tracking data already in the system. The setup is a one-time configuration. Once saved, the report reruns every April in minutes.

What's automatic:

Time entries post to projects and phases as work happens — this is the standard BaseBuilders time tracking workflow. Every hour logged by every team member carries a project, a phase, a date, and a staff identifier automatically. No additional data entry is required for the labor report beyond what the firm is already doing to manage project finances.

Direct labor rates are configured per employee as part of the standard BaseBuilders setup — the same rates used for overhead factor calculation, billing rate development, and project cost tracking. The labor report draws on these rates to populate the Direct Labor column automatically.

What requires one-time configuration:

The activity field ships with default values in BaseBuilders — Design, Drafting, Field Work, and similar standard categories. For R&D credit purposes, the activity list should be reviewed and customized in consultation with your CPA to clearly distinguish qualifying technical activities from non-qualifying administrative ones. This is a one-time setup that makes the Activity column analytically useful to the CPA and defensible if the credit is audited.

The saved report template:

Once the activity configuration is in place, the R&D column set is defined and saved as a named template in BaseBuilders. Generating the annual labor report then becomes a three-step process: query for the desired date range, select the saved R&D column set, and export.

The CPA receives the same seven-column CSV in the same format every year. They can sort, group, and analyze the data by phase and activity to make their qualification determinations — with complete information rather than a partial picture that requires estimation. The credit gets filed on schedule without a reconstruction exercise.

What Your CPA Needs Beyond the Labor Report

The labor report is the piece most firms don't have ready. It is not the only piece the CPA needs. Understanding the full documentation package helps the firm prepare efficiently and avoid the back-and-forth that extends the filing timeline and increases CPA fees.

A complete R&D Tax Credit claim for an A/E firm typically requires:

Qualified research project list — a list of projects active in the tax year that involved qualified research activities, with a brief description of the technical uncertainty each project was addressing. This comes from the firm's project records and the principal's knowledge of the work.

Technical narratives — written descriptions of the qualified research activities performed on each project, explaining how the four-part IRS test is satisfied. These are prepared by the CPA in consultation with the firm's technical staff and are the most time-intensive documentation component.

Evidence of experimentation — documentation showing that the firm evaluated alternatives, compared approaches, and iterated toward a technical solution. Meeting notes, email correspondence about design alternatives, calculation records, and model comparisons all serve as evidence of experimentation.

Time and allocation records — the labor report. This is item four. BaseBuilders generates it.

Payroll records — the CPA needs to verify that the qualified research wages in the labor report match the firm's payroll records for the tax year. The direct labor column in the BaseBuilders export should reconcile to the payroll data for employees who performed qualifying work.

Contractor and consultant costs — if the firm engaged contractors or consultants to perform qualifying research activities, 65% of those costs may be includable as qualified research expenses. These records come from the firm's accounts payable and subconsultant management records.

Supply costs — materials used directly in the qualifying research activities may be included. For A/E firms, this category is typically small — it covers physical supplies used in the design process, not software subscriptions or equipment.

Prior-year qualified research expense history — if the firm has claimed the credit in prior years, that history affects the credit calculation methodology. The CPA maintains these records once the credit has been established.

Documentation of activities not qualifying — the CPA may need records showing that non-qualifying activities (Bidding, CA, administrative work) were excluded from the qualified research expense calculation.

Signed declaration — the return preparer and the taxpayer must sign declarations attesting to the accuracy of the credit claim. This is administrative but required.

BaseBuilders owns item four cleanly. Items one through three and five through ten are assembled from materials that already exist in the firm's project files, payroll records, and accounting system — with CPA guidance to organize and present them correctly.

→ Read: R&D Tax Credit Documentation for A/E Firms: How to Prepare the CPA Handoff‍

The IRS Form 6765 Update — What Changed and What It Means

For tax years beginning after December 31, 2025, the IRS requires R&D Tax Credit claims to report qualified research expenses by business component — meaning by specific project or project category — rather than as a single aggregate figure.

This change increases the documentation burden for firms that have been claiming the credit on an aggregate basis. It also increases the value of the per-project labor report that BaseBuilders generates — because the phase-level, project-level data that the labor report contains is exactly what the new Form 6765 business component reporting requires.

Firms that have been maintaining phase-level time tracking and generating annual labor reports by project are already positioned for the new reporting requirement. Firms that have been claiming the credit on an aggregate basis will need to restructure their documentation — and their time tracking — to support project-level reporting going forward.

For A/E firms using BaseBuilders, the labor report already organizes qualifying labor by project and phase. The data structure that Form 6765 now requires is the data structure BaseBuilders has always generated. No restructuring is needed.

R&D Tax Credit Deep Dives

These articles cover each component of the R&D Tax Credit process for architecture and engineering firms — from initial qualification through labor report generation and CPA handoff.

Does Your A/E Firm Qualify for the R&D Tax Credit?
The IRS four-part test applied to A/E work — what it requires, why most firms meet it without realizing it, and the project types and activities most likely to qualify.

Qualifying Activities for the R&D Tax Credit in Architecture and Engineering Firms
Phase-by-phase and activity-by-activity — what counts, what doesn't, and the reasoning behind the distinctions that determine how much of the firm's labor qualifies.

The R&D Tax Credit Labor Report: What Your CPA Actually Needs from Your A/E Firm
The seven-column CSV, how BaseBuilders generates it, what the one-time configuration involves, and how to save the report template so tax time takes minutes instead of days.

R&D Tax Credit Documentation for A/E Firms: How to Prepare the CPA Handoff
All ten items in the complete documentation package — where they come from, what BaseBuilders produces automatically, and how to organize the handoff so the CPA can file without follow-up questions.

How the R&D Tax Credit Connects to the Rest of the Firm

The R&D Tax Credit is not a standalone accounting exercise. It connects directly to the financial systems the firm is already running — and the firms that are best positioned to claim the credit are the ones whose financial systems were already producing the data the credit requires.

A/E accounting — the direct labor rate per employee that appears in the labor report's seventh column is the same rate used to calculate the overhead factor. A firm with a correctly structured chart of accounts — direct and indirect labor separated, payroll taxes and benefits tracked — already has the compensation data the labor report draws on. The accounting structure and the R&D documentation requirement are pointing at the same data.

Time tracking — phase-level time tracking with activity tagging is the prerequisite for the entire labor report. A firm tracking time at the project level without phase separation cannot generate a qualifying labor report without a manual reconstruction exercise. A firm tracking time at the phase level but without activity tagging cannot separate qualifying activities — design, modeling, structural analysis, technical coordination — from non-qualifying activities that occur within the same phase, like project management and staff scheduling. Both layers are required. A firm tracking time against phases and activities as a normal practice generates the labor report as an automatic output of data that already exists.

Project management — the projects that generate qualifying research expenses are the ones managed through BaseBuilders with phase budgets, phase-level time tracking, and activity tagging. The project management system is not a separate documentation source for the R&D credit — it is the primary documentation source.

Financial metrics — the direct labor figure in the labor report is the same direct labor figure that drives the overhead factor, the net multiplier, and the firm's core financial performance metrics. The R&D credit documentation and the financial management system are drawing from the same data source. A firm that has invested in getting that data right for financial management purposes has also invested in getting it right for R&D credit purposes.

→ See: BaseBuilders vs Monograph

→ See: BaseBuilders vs BQE Core

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