Tool 04 · R&D credit
IRC Section 41 R&D tax credit, Section 174A and contingency fee audit calculator
Enter engineering wages, supplies, contractor spend and project count. The calculator estimates federal and state credits, the year-one tax cost of offshore R&E, the funded-research risk from your contract mix, and the difference between a contingency fee and a fixed-fee study.
01The arithmetic
The 7.9% federal figure approximates the Alternative Simplified Credit for a company whose QREs are steady or growing; the effective net yield usually lands between 6.5% and 9.2%. State yields in the tool are effective estimates on total QRE, lower than headline rates because most state credits are incremental.
| Line | Arithmetic | Result |
|---|---|---|
| Total QRE | $1.8M + $150K + 65% × $300K | $2,145,000 |
| Federal credit | 7.9% × $2,145,000 | $169,455 |
| California credit (est.) | 5.5% × $2,145,000 | $117,975 |
| 25% contingency fee | 25% × $287,430 | $71,858 |
| Fixed-fee study, 8 components | $8,500 + 8 × $1,200 | $18,100 |
| Fee saving | $71,858 − $18,100 | $53,758 |
02Funded research: the T&M trap
Under IRC § 41(d)(4)(H), research funded by another party does not qualify. For engineering firms, the test turns on the contract: if you are paid regardless of whether the work succeeds (time-and-materials, cost-plus) or you do not keep substantial rights to the results, the IRS treats the research as funded. Fixed-price contracts where you bear the risk of failure are the usual safe harbor.
The calculator flags risk from your revenue mix and shows how much credit would be exposed to challenge. Before the study, sort contracts into fixed-price and T&M and read the payment and IP clauses of the largest ones.
03Form 6765 Section G and why it changes the fee model
Form 6765 now asks for business-component level detail: which projects, what wages and supplies were allocated to each, and the information sought. That favours studies built from engineering records (design iterations, test results, change logs) over blanket payroll percentages. A fixed-fee study priced per business component tracks the real work; a contingency fee grows with the size of the claim regardless of effort.
| Gross credit | 25% contingency | Fixed fee (8 components) | Difference |
|---|---|---|---|
| $100,000 | $25,000 | $18,100 | $6,900 |
| $287,430 | $71,858 | $18,100 | $53,758 |
| $500,000 | $125,000 | $18,100 | $106,900 |
More detail on the A&E and custom-machine case is in the Form 6765 substantiation playbook. Estimates only; confirm your position with a CPA.
Benchmarks are typical 2025-2026 market ranges compiled by Engineer Aid, an independent desk not affiliated with the vendors named. Quotes vary by region, volume and timing; nothing here is legal, tax or engineering advice. Revised 2026-11-06.
Questions buyers ask
How much is the federal R&D credit worth for an engineering firm?
Under the Alternative Simplified Credit, the net federal credit after the Section 280C reduction is roughly 6.5% to 9.2% of total qualified research expenses, about 7.9% for a typical steady or growing company.
Do offshore engineering contractors count toward the R&D credit?
No. Research conducted outside the United States is excluded from qualified research expenses, and foreign research spend must be amortized over 15 years under Section 174.
Is a 25% contingency fee normal for an R&D study?
Contingency fees of 20% to 30% of the credit are common, but a fixed-fee study priced per business component is often far cheaper on larger claims: for a $287,000 credit, a 25% fee is about $71,900 versus about $18,100 fixed for eight components.
Can engineering firms claim R&D credits on client work?
Only if the research is not funded: typically the contract must be fixed-price with payment contingent on success and the firm must keep substantial rights. Time-and-materials and cost-plus work is usually treated as funded research under § 41(d)(4)(H).