Aerospace and Defense R&D Tax Credits
In the fast-evolving aerospace and defense landscape, where AI-powered autonomous systems, hypersonic weapons, and sustainable propulsion innovations drive national security and commercial breakthroughs, your R&D efforts are eligible for powerful federal and state tax incentives under IRC §41. These dollar-for-dollar R&D tax credits reward the technical experimentation behind reusable launch vehicles, advanced materials for stealth aircraft, and resilient satellite constellations.
Examples of Qualifying Activities in Aerospace & Defense
- Aircraft and UAV Design IterationsDeveloping or refining airframe structures for reduced drag, such as optimizing wing geometries using computational fluid dynamics (CFD) simulations to balance lift, weight, and fuel efficiency while meeting FAA certification standards.
- Propulsion System PrototypingBuilding and testing hybrid or electric propulsion units, including thrust vector control mechanisms, to address thermal management challenges in high-altitude operations.
- Autonomous Systems IntegrationExperimenting with AI-driven navigation algorithms for drones or unmanned vehicles, evaluating sensor fusion techniques to resolve uncertainties in real-time obstacle avoidance under varying environmental conditions.
- Advanced Materials and Coatings DevelopmentTesting novel composite layups or stealth coatings for radar absorption, iterating on formulations to improve durability against extreme temperatures and corrosion without compromising structural integrity.
- Missile and Munitions Guidance EnhancementsRefining inertial navigation systems through wind tunnel trials and software modeling to eliminate trajectory uncertainties in hypersonic environments.
- Satellite and Communications InfrastructureDesigning phased-array antennas for low-Earth orbit satellites, prototyping beam-forming algorithms to overcome signal interference in multi-satellite constellations.
What Qualifies as R&D in Aerospace & Defense?
Your projects may qualify if they:
- Pursue a Permitted Purpose: Aim to create or improve products, processes, or software for better function, performance, reliability, or quality, such as enhancing avionics for faster data processing in fighter jets.
- Address Technical Uncertainty: Tackle questions like "Can we achieve 30% weight reduction in rotor blades without fatigue failure?" or "Will this encryption protocol secure defense communications against quantum threats?" Technical uncertainty refers to unknown engineering outcomes or performance limitations.
- Involve Experimentation: Use modeling (e.g., finite element analysis or Monte Carlo simulations), prototype builds, iterative testing, or failure analysis to evaluate alternatives. A process of experimentation is an iterative evaluation of design alternatives.
- Rely on Hard Sciences: Draw from aerospace engineering, materials science, physics, or computer science, excluding routine data collection or market research.
These are the same qualification standards applied by the IRS across all engineering-driven industries, including aerospace, defense, propulsion, and advanced materials.
Government contractors note: IRAD and SBIR work can qualify to the extent you retain substantial rights and bear economic risk, so it is not treated as funded research under §41. The IRS typically evaluates whether your project documents show: clear technical uncertainty, defined hypotheses or alternatives, experimental iterations, and reliance on engineering or physical sciences.
Common Roles Involved
- Aeronautical, materials, electrical, and RF engineers
- CAD/3D modeling and systems design engineers
- Data scientists and simulation analysts
- Operations technicians and quality assurance analysts
- Product managers and systems architects
- C-suite executives overseeing R&D strategy
- Technical directors and third-party contractors (e.g., test labs)
Key Details
These roles reflect typical aerospace R&D team structures found in avionics, propulsion, composites manufacturing, satellite engineering, and defense systems development. Even indirect support, like technicians calibrating test equipment, may qualify if tied to experimentation.
What does not qualify
- Routine production or assembly using established methods
- Quality control, reverse engineering, or adaptations of existing designs without uncertainty
- General business functions like marketing, sales, or administrative tasks
- Capital improvements to facilities unrelated to specific experiments
- Funded research where you don't retain substantial rights (e.g., pure government contracts without IP retention)
- Styling, cosmetic changes, or efficiency tweaks without technical experimentation
Key Details
A common misconception is that aerospace engineering performed under a government contract never qualifies, but only research treated as funded and lacking substantial rights is excluded. Focus on core R&D to avoid IRS challenges.
Compliance and Documentation
§174 Update
Following the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, §174 now allows immediate expensing of domestic research expenses for tax years beginning on or after January 1, 2025. Taxpayers may also elect optional amortization under new §174A. Foreign research expenses must still be amortized over 15 years. This is separate from the §41 credit but impacts overall tax planning.
Key Documentation to Maintain:
- Project timelines, design logs, and engineering change notices (ECNs)
- Test data, simulation outputs, and failure analyses (including iterations)
- Time tracking for personnel on qualified projects
- Vendor invoices and contracts for supplies or third-party work
- Contemporaneous notes on uncertainties and experimentation rationale
Frequently Asked Questions
Financial service companies may be unaware that their clients qualify for the ERTC, or they may not want to wade into what seems like a complicated new tax credit. Repeated changes to the ERTC program have added additional barriers to claim the credit. Additionally, instead of trying to adapt to the changing ERTC rules, many CPAs and payroll companies have chosen to outsource ERTC claims for their clients. As a specialty tax company, we love claiming credits like the ERTC for our clients.
Even though the ERTC officially ended on September 30, 2021 with the signing of the Infrastructure Bill, the Bill also allowed business owners the ability to retroactively claim the credit up to five years from when they filed their original return (extended from the previous 3-year statute of limitations).
The IRS clarified in Notice 2021-49 that business owners with a majority stake (51%) in a business cannot claim their wages when they apply for the tax credit. Attribution rules, which outline the legal principal owners of a business, must also be applied to determine if family members’ wages can be qualified wages too.
If a business owner qualifies for the ERTC in 2020 or 2021 but hasn't applied yet, the only way to apply for the ERTC right now is to file an amended Form 941-X. With up to $26,000 per employee available, filing an amended return makes financial sense.
Next Steps
Use our calculator to estimate your potential federal and state benefits
Schedule a consultation to structure your row crop research activities
If you are innovating in aerospace and defense, you may already be doing R&D. Let's make sure you are rewarded for it.
Contact Strike Tax Advisory
Ready to maximize your R&D tax credits? Get in touch with our team of experts.
