The R&D tax credit for agencies
The short answer
Agency engineering can qualify, but the funded research exclusion usually blocks it: work a client owns and pays for regardless of outcome does not count. Work the agency funds itself, and keeps rights to, can.
What qualifies, and what fights you
The rule that matters most for agencies is the funded research exclusion. If a client pays you regardless of whether the work succeeds, and the client owns the resulting IP, that work generally does not qualify for your credit, even if it involved real technical uncertainty.
What does qualify is work the agency funds and owns itself: an internal framework, a proprietary platform, or tooling built at the agency's own financial risk and reused across client engagements. That work was not paid for by a specific client and its rights stay with the agency.
There is a real nuance here worth stating honestly. A fixed-fee project where the agency only gets paid if it delivers, and where the agency retains rights to the underlying technology, can still qualify. The funded research test looks at payment contingency and who keeps the rights, not simply whether a client's name is on the invoice.
The four-part test, applied to agencies
Qualified purpose for an agency usually means building an internal tool or platform that improves how it delivers client work, not the client deliverable itself. Technological in nature means the work is engineering, like a rendering framework or build pipeline, not creative or design work. Elimination of uncertainty shows up when the team does not know whether a proposed internal architecture will actually work across the range of client tech stacks it needs to support.
Process of experimentation is the iteration on that internal tool: testing different framework architectures, revising the approach after it fails to handle a client's edge case, and refining it over multiple internal releases. Time tracking matters here, because a study needs to separate hours spent on the internal tool from hours billed to clients.
New to the test itself? Read what software work qualifies as R&D first.
Work that usually qualifies
Internal rendering or component framework
Building a proprietary framework at the agency's own expense, used across multiple client projects rather than billed as a line item on any single one.
Custom CMS or platform the agency owns
Building and retaining rights to a headless CMS or commerce platform that the agency licenses or reuses across engagements.
Internal tooling and build pipelines
Investing in automated deployment or developer tooling outside of billable client hours, aimed at solving a real technical problem in how the agency ships work.
Fixed-fee, at-risk projects with retained IP
A project where the agency is paid only if it delivers and keeps rights to the underlying technology, even though a client's brief kicked it off.
Work that usually does not
Client-funded, client-owned deliverables
Work billed hourly or by milestone, where the client pays regardless of outcome and owns all resulting IP, is the classic funded research exclusion.
Visual design, branding, and copywriting
Creative work can be difficult, but it does not involve the kind of technological uncertainty the four-part test requires.
Which expenses count
W-2 wages for engineers building qualifying internal tools count as QRE, but only for the time tracked to that internal, non-billable work rather than time billed to a specific client.
US-based contractors doing that same internal platform work count at 65 percent of what you pay them.
Cloud costs for hosting and developing internal tools count as supply expenses. Hosting costs billed through to a client as part of a project generally do not, since that spend is part of the funded engagement.
A worked example
Hypothetical example. A digital agency has 8 engineers, but only a portion of their time goes to an internal component framework the agency funds itself, alongside one contractor on the same project.
At roughly 6 to 10 percent of total QRE, the federal credit lands around $15,000 to $25,000. Agencies under $5 million in revenue can apply up to $500,000 of that credit against payroll taxes each year.