Many engineering, architecture, and design firms still assume that technically complex contract work can qualify for the R&D tax credit. The assumption feels reasonable. If the work is customized, difficult, and performed by engineers, it should count.
Recent court decisions make clear that this assumption no longer holds for most contract-based engagements. Today, R&D credit eligibility is often decided by contract language before technical documentation or engineering testimony is even considered.
Courts have effectively converged on a single controlling rule when evaluating R&D credits tied to client contracts.
If a contract guarantees payment regardless of whether technical uncertainty is resolved, the research is treated as funded under Section 41 and the credit is excluded.
That conclusion does not depend on how sophisticated the engineering work is. It depends on one thing only: who bears the economic risk if the research fails. When payment is assured, that risk does not sit with the taxpayer, and the analysis ends there.
The Eighth Circuit’s decision in Meyer, Borgman & Johnson, Inc. v. Commissioner reinforced how strictly this rule is now applied. MBJ was a structural engineering firm performing customized design work. The technical nature of the work was not in dispute.
What mattered was the contract structure.
The court found that:
Once those facts were established, the funded-research exclusion applied. The technical story never became relevant.
A recurring mistake in contract-based R&D claims is assuming that difficulty or customization creates eligibility. Courts have repeatedly rejected that logic.
They have made clear that:
When compensation is tied to services delivered rather than research success, courts treat the work as funded, even when the technical challenges are real.
A recurring mistake in contract-based R&D claims is assuming that difficulty or customization creates eligibility. Courts have repeatedly rejected that logic.
They have made clear that:
When compensation is tied to services delivered rather than research success, courts treat the work as funded, even when the technical challenges are real.
Some firms still point to Populous Holdings to justify contract-based R&D claims. That reliance is often misplaced.
Populous turned on contract terms that placed genuine research risk on the taxpayer and allowed meaningful retention of rights. Payment exposure and economic downside were central to the outcome.
Most service contracts do not resemble that structure. In cases like MBJ, courts have aligned taxpayers with prior losses rather than with Populous. Citing Populous does not overcome guaranteed payment language.
When contract-based R&D claims are challenged, the outcomes are increasingly predictable.
These results are not driven by aggressive enforcement. They stem from claims that are structurally unsupported from the outset.
The gaps exposed in the MBJ decision reflect the same structural issues many companies face today. National Tax Group and TaxDrone.AI work together to impose clarity where contracts and documentation often fall short.
They help companies ensure that:
National Tax Group provides the compliance judgment grounded in case law. TaxDrone.AI provides the system that enforces that discipline operationally.
The goal is not to justify credits. It is to prevent claims that will not survive review.
The MBJ decision reinforces a boundary that is no longer ambiguous.
If a contract guarantees payment regardless of research success, filing an R&D credit claim is a decision, not a gray area.
Once examined, the outcome is increasingly clear. If you want to understand how this risk is identified before filing, a short TaxDrone.AI walkthrough shows how National Tax Group applies this standard in practice.
