Industries · Technology & Hardware

R&D tax credit for technology, hardware & engineering

Prototyping and iterative design are the heart of hardware development — and the heart of the R&D credit. If your team is engineering physical products and systems, developing firmware and electronics, and testing toward a target, you’re likely doing qualified research. A Ricerca study captures it with defensible documentation.

Why hardware & engineering qualifies

A new or improved device, board, mechanism, or system is a business component. The work qualifies when your team faces genuine technical uncertainty — about whether a design is even capable, which method will work, or what the appropriate design is — and resolves it through a systematic process of experimentation: modeling, prototyping, and physical testing.

Every qualifying activity must pass the IRC §41 four-part test — permitted purpose, technological in nature (engineering and the physical sciences), elimination of uncertainty, and a process of experimentation. Hardware development maps to this naturally, because iterative design and test is a process of evaluating alternatives.

Crucially, qualification is about the process, not the result. A prototype that failed, a design you abandoned, and the materials you consumed proving out an approach can all be part of a defensible claim.

Qualifying activities

The engineering work that commonly qualifies

Representative activities we see meet the four-part test across hardware, electronics, and mechanical engineering.

Prototyping & design iteration

Building and refining prototypes through successive design cycles to resolve uncertainty about an approach.

Firmware & embedded development

Developing firmware and embedded software where timing, resource, or hardware-interface uncertainty must be resolved.

Electronics & PCB design

Schematic capture, board layout, and signal-integrity work where the right design isn’t known in advance.

IoT systems

Integrating sensors, connectivity, power, and edge logic into reliable connected devices and systems.

Materials selection & testing

Evaluating and testing materials to meet performance, durability, thermal, or cost requirements.

Mechanical & thermal design

Mechanical, enclosure, and thermal design where modeling and physical testing drive the solution.

Test, validation & reliability

Designing and running tests for performance, reliability, and life — and engineering toward the targets.

Tooling & fixtures

Developing custom tooling, jigs, and fixtures needed to build and evaluate prototypes and assemblies.

Environmental & compliance testing

Iterative design and testing to meet environmental, safety, EMC, or regulatory requirements.

Qualified Research Expenses

Typical QRE categories for hardware

What spending counts toward the credit — tailored to how engineering teams actually spend.

Engineering wages

W-2 wages for engineers and technical staff performing, supervising, or directly supporting qualified development and testing.

§41(b)(2)(A)–(B)

Prototype supplies

Materials and components consumed in building and testing prototypes — not depreciable equipment.

§41(b)(2)(C)

Contract engineering (65%)

65% of amounts paid to U.S. third parties for qualified research and engineering performed on your behalf.

§41(b)(3)

Cloud & compute

Amounts paid to rent compute for simulation, modeling, and analysis used in qualified research.

§41(b)(2)(A)(iii)

A note on supplies: prototype materials and components consumed in development and testing are eligible under §41(b)(2)(C), but depreciable equipment, tooling that becomes a capital asset, and general overhead are not. A study draws these lines before anything is claimed.

Don’t forget §174A

Domestic engineering is fully deductible again

New IRC §174A restores immediate, full expensing of domestic research & experimental costs — including domestic engineering and software development — for tax years beginning after December 31, 2024. Captured alongside the §41 credit, you get the deduction and the credit.

Understand §174A

Illustrative example

What a hardware study can look like

A hypothetical scenario to show how the pieces fit together. It is not a quote, projection, or promise of results.

Hardware startup — new IoT device

Illustrative

Engineering payroll: $1.5M
Share qualified: ~65%
Prototype materials: $250K
U.S. contract engineering: $200K
Estimated QRE: ~$1.4M
Illustrative federal credit: ≈ $85K–$140K

Illustrative only. Figures are hypothetical and rounded; contract engineering is included at 65% and the federal credit commonly works out to roughly 6–10% of QRE depending on method and filing history. Your result depends entirely on your facts. This is not a quote or a guarantee.

FAQ

Technology & hardware — frequently asked questions

Do prototype materials count?

Yes. Tangible property consumed in building and testing prototypes is an eligible supply QRE under §41(b)(2)(C). Land, improvements, and depreciable equipment are excluded — but the materials and components used up in experimentation generally qualify.

Does a failed prototype still qualify?

Yes. Qualification turns on the process of experimentation, not the outcome. A prototype that didn’t work — or a design you abandoned — can still represent qualified research, because you were systematically resolving genuine technical uncertainty.

Does testing and validation count?

When testing is part of resolving technical uncertainty — evaluating alternatives, validating a design against requirements, or reliability and life testing during development — it can qualify. Routine quality control on units already in commercial production does not.

Does §174A apply to our domestic engineering?

Yes. Domestic research & experimental costs — including engineering and software development performed in the U.S. — are eligible for immediate, full expensing under §174A for tax years beginning after December 31, 2024. See our Section 174A guide.

Do U.S. contract engineers count?

Yes, at 65% of the amount paid under §41(b)(3), provided the qualified research is performed in the United States and you bear the risk and retain rights. Research performed outside the U.S. is excluded.

We’re not a lab — do we still qualify?

Very likely. The credit rewards technical problem-solving across hardware, electronics, firmware, and mechanical engineering — not just white coats. If you’re iterating on physical products and systems to resolve uncertainty, the four-part test can be met.

See what your engineering qualifies for

Tell us about your products and development work, and we’ll map your qualifying engineering to the four-part test — including §174A domestic expensing — reviewed and finalized by R&D experts and backed by Audit Protection. Contact us for pricing tailored to your study.