The federal research credit under Internal Revenue Code Section 41 can benefit businesses undertaking qualifying technical work, including architectural and engineering services. Eligibility depends on the activities performed, the expenses claimed, and any applicable exclusions. Complex design work alone does not establish eligibility.

The McConnell v. Commissioner order cited in the original study, docket No. 12389-23L, dated December 3, 2024, directs the parties to provide a case-status update. It contains no substantive research-credit ruling. The architectural funding dispute discussed in the study belongs to Smith v. Commissioner, while the engineering uncertainty and experimentation findings belong to Phoenix Design Group, Inc. v. Commissioner. These cases must be considered separately.

The Statutory Framework: Sections 41, 174, and 174A

Section 41 generally provides an incremental credit calculated using qualified research expenses and the applicable base or alternative simplified credit rules. Qualifying research must satisfy the expenditure test, seek technological information useful in developing or improving a business component, and involve a qualifying process of experimentation. The analysis applies separately to each business component.

For the historical years addressed in the cases discussed below, the expenditure test referred to Section 174. The Tax Cuts and Jobs Act required capitalization and amortization of specified research or experimental expenditures for tax years beginning after December 31, 2021: five years for domestic expenditures and fifteen years for foreign expenditures. The 2025 legislation commonly called the One Big Beautiful Bill Act introduced Section 174A for domestic expenditures in tax years beginning after December 31, 2024, and amended Section 41’s expenditure cross-reference accordingly. A research deduction does not automatically establish entitlement to a research credit.

The final column retains the original table heading, but the cited McConnell order establishes no post-McConnell research-credit standard.

Correct Case Attribution: McConnell, Smith, and Phoenix Design Group

The source study combined facts and reasoning from two unrelated research-credit disputes. Smith concerned partners in an architectural practice. Phoenix Design Group concerned an engineering company designing mechanical, electrical, plumbing, and fire-protection systems. Neither set of findings should be attributed to the cited McConnell order.

The Funded Research and Rights Retention Analysis

In Smith, the Tax Court’s December 18, 2024 order denied the IRS’s summary-judgment motion. Questions concerning contractual payment conditions and retained rights remained for trial. That procedural ruling did not establish entitlement to the credit.

The subsequent decision, Smith v. Commissioner, T.C. Memo. 2026-50, issued June 16, 2026, found that the architectural firm retained substantial rights in four of six sample projects and lacked substantial rights in two. For the four projects with retained rights, payment was not contingent on research success. Potential credit eligibility was therefore limited to otherwise qualifying expenses exceeding the funding received, if established. The decision did not simply approve all milestone-based contracts.

Under Treasury Regulation Section 1.41-4A(d), lack of substantial rights can fully exclude research. Where substantial rights remain but payments fund the research, the exclusion applies to the extent of funding. Retained rights need not be exclusive. Each agreement must be evaluated as a whole, including ownership, reuse restrictions, payment obligations, and consequences of unsuccessful work.

Technical Uncertainty and Investigatory Activity

In Phoenix Design Group, Inc. v. Commissioner, T.C. Memo. 2024-113, the court rejected the engineering firm’s claimed research on the record presented. The company did not adequately identify unavailable information creating technical uncertainty or demonstrate a qualifying evaluation of alternatives. Applying calculations to information already available did not, by itself, establish investigative research.

This finding does not exclude engineering as an industry or require discovery of principles new to science. Treasury Regulation Section 1.41-4 expressly permits reliance on existing scientific and engineering principles. The question is whether the taxpayer faced qualifying uncertainty and used an evaluative process to resolve it, rather than simply applying a known solution. An unfinished design or changing customer preference is not enough by itself.

Comparing the Relevant R&D Litigation

These decisions address different elements of the credit and different evidentiary records. They do not establish a single new documentation regime or an uninterrupted rule of taxpayer defeat.

Little Sandy Coal and the Limits of Novelty

In Little Sandy Coal Co. v. Commissioner, T.C. Memo. 2021-15, affirmed at 62 F.4th 287 (7th Cir. 2023), a shipbuilder failed to substantiate the substantially-all experimentation requirement. A vessel’s novelty did not establish the proportion of qualifying research activities. The test concerns activities, not the percentage of a finished vessel composed of new physical features.

The Seventh Circuit rejected a categorical exclusion of direct support and supervision from the experimentation numerator. Such activities can count when they themselves constitute elements of an experimental process. The decision did not authorize automatically counting all support or supervisory labor. The taxpayer still needed a supported basis for identifying and measuring qualifying activities.

Siemer Milling and the Meaning of Experimentation

In Siemer Milling Co. v. Commissioner, T.C. Memo. 2019-37, the court denied credits because the taxpayer failed to demonstrate that its projects met the relevant qualification requirements, including experimentation. A narrative listing development steps did not adequately explain a scientific evaluation of alternatives. The court nevertheless found reasonable reliance on professional advice sufficient to avoid the asserted accuracy-related penalties.

Systematic trial and error is expressly recognized by Treasury Regulation Section 1.41-4(a)(5). Modeling and simulation are examples, not mandatory methods for every claim. Taxpayers should identify the uncertainty, alternatives evaluated, method of evaluation, and resulting findings. Neither an academic laboratory format nor a particular number of failed tests is universally required.

Betz and Moore: Substantiating Activities and Wages

In Betz v. Commissioner, T.C. Memo. 2023-84, shareholders of a company supplying air-pollution-control systems failed to establish claimed pilot-model production expenses and qualified employee services. Five projects also failed the substantial-rights requirement. The court sustained accuracy-related penalties. The result reflects deficiencies in that record, not a universal prohibition on testimony or reasonable estimates.

In Moore v. Commissioner, T.C. Memo. 2023-20, affirmed by the Seventh Circuit in 2024, the disputed expenses were compensation paid to the president and chief operating officer of a scoreboard manufacturer. The taxpayers failed to substantiate the portion of his time attributable to qualified research or direct supervision. General product-development and management involvement did not establish an allowable wage allocation. This did not disallow every research expense of the company.

The Substantially All Test and the Shrink-Back Rule

Treasury Regulation Section 1.41-4(a)(6) requires 80 percent or more of a taxpayer’s research activities for a business component to constitute elements of a process of experimentation for a qualified purpose. Activities may be measured on a cost basis or another consistently applied reasonable basis. The rule is not automatically an employee-hours test.

Experimentation fraction = research activities constituting elements of a qualifying experimental process ÷ relevant research activities for the business component. The required fraction is at least 80 percent.

The numerator and denominator must be defined consistently with the governing rules. The regulation permits the remaining research activities to satisfy the expenditure test without constituting experimentation, provided they are not otherwise excluded. This activity-level test is distinct from the separate substantially-all rule for employee qualified-service wages.

Under Treasury Regulation Section 1.41-4(b)(2), when a business component fails the qualification requirements, the analysis moves to its most significant subset of elements and continues to smaller subsets until the requirements are satisfied or the most basic element is reached. Shrink-back does not guarantee a credit or permit selection of an arbitrary cost category. Evidence must support the qualifying subset and associated expenses. Time records can help, but they are not the only permissible evidence.

Implications for Future R&D Tax Credit Claims

Taxpayers must establish both that qualifying research occurred and that claimed expenses are attributable to it. The Cohan estimation doctrine has not been universally abolished for research credits. An estimate requires an adequate factual foundation and cannot replace proof of statutory qualification. Unsupported percentages remain vulnerable to rejection.

The Value of Contemporaneous Documentation

Treasury Regulation Section 1.41-4(d), together with Section 6001 and its regulations, requires records sufficient to substantiate the credit. Contemporaneous records are valuable evidence, but the cited cases do not impose a universal requirement for one specific timekeeping system or a separately titled technical project file. A practical documentation approach includes:

• Initial uncertainty records: Explain what available information did not establish concerning capability, method, or appropriate design.
• Evaluation records: Preserve alternatives, calculations, prototypes, simulations, test results, and design revisions showing how the uncertainty was investigated.
• Activity and cost support: Link payroll, supplies, and qualifying contract research to the relevant activities. Explain allocation methods and distinguish routine work.
• Contract analysis: Record payment conditions, retained rights, reuse limitations, and any funding that reduces qualifying expenses.

Professional Advice and Penalties

A denied credit does not automatically produce an accuracy-related penalty. Section 6662 and the reasonable-cause and good-faith rules in Section 6664 require a separate analysis. Professional reliance generally depends on competent advice, adequate and accurate information, and actual good-faith reliance. Betz and Siemer Milling illustrate different penalty outcomes.

An adviser should examine technical evidence and contractual restrictions rather than merely accept broad estimates. The adviser’s fee arrangement does not alone determine whether the credit qualifies or whether a penalty applies.

Legislative Relief and Compliance: TCJA and OBBBA

The 2025 legislation changed the timing of research deductions without removing Section 41’s separate qualification and substantiation requirements. Businesses should distinguish deductions, income-tax credits, and payroll-tax elections.

Restored Domestic Expensing under Section 174A

Section 174A permits deduction of domestic research or experimental expenditures for tax years beginning after December 31, 2024, subject to applicable rules. This treatment is not limited to small businesses. Taxpayers may instead elect capitalization and amortization over at least 60 months beginning when benefits are first realized. Foreign research expenditures generally remain subject to fifteen-year amortization under Section 174.

Eligible small businesses could elect retroactive Section 174A treatment for tax years beginning in 2022 through 2024. Eligibility included satisfying the Section 448(c) gross-receipts test for the first tax year beginning after December 31, 2024, generally $31 million or less, and not being a tax shelter. The general election deadline was July 6, 2026, with earlier refund-limitation deadlines potentially controlling. As of September 13, 2026, that general deadline has passed.

Separate transition provisions allow recovery of remaining unamortized domestic expenditures from the 2022–2024 period over one or two tax years beginning with the first tax year after December 31, 2024. Revenue Procedure 2025-28 sets out elections and accounting-method procedures. The appropriate route depends on the taxpayer’s circumstances; not every retroactive election requires the same method-change filing. Section 280C coordination must also be considered.

Small Business Tax Incentives

The payroll election’s lookback concerns gross receipts, not taxable income. The $31 million threshold relates to the special retroactive small-business election, not to prospective domestic expensing generally.

Administrative Requirements and IRS Review

The IRS reviews research-credit refund claims for required information and may examine the merits separately. Its published guidance does not support treating a purported new automated classifier as a substantive legal test. Nor should a universal requirement for technical-adviser approval before declining penalties be asserted without applicable authoritative guidance.

For refund claims postmarked after June 18, 2024, IRS guidance requires identification of the business components, the research activities performed for each component, and totals for qualified employee wages, supplies, and contract research expenses. The IRS extend