Congratulations on Your SHIELD Award! Your Innovations May Qualify for the R&D Tax Credit

ARTICLE | February 16, 2026

Authored by Aprio, LLP

This article was originally published by Aprio on February 17, 2026.

Summary: The Missile Defense Agency (MDA) is advancing cutting-edge technologies through SHIELD. Properly tracking your time, expenses and cost allocations can help your company maximize the R&D Tax credit and substantially offset some of the investment required to develop and deliver these innovations.

Government Contractors Can Claim the R&D Tax Credit

Government contractors can often qualify for the R&D tax credit, depending on the scope of work, fee terms, and intellectual property (IP) rights for each specific contractor. With more than a thousand businesses entering the Scalable Homeland Innovative Enterprise Layered Defense (SHIELD) contract, many will be eligible to claim the R&D tax credit for their efforts. Those not pursuing the credit could miss out on significant cash savings and tax reductions.

What is SHIELD?

SHIELD is the MDA’s contract framework for the Golden Dome of America effort to create a homeland missile defense architecture by issuing task and delivery orders under one broad contract. Specifically, the contracted work will include developing technology to detect, monitor, intercept, and neutralize threats from ballistic, hypersonic, and cruise missiles. Over the next 10 years, the U.S. is expected to allocate $151 billion to participating contractors across many different types of work.

Many of the scopes of work for SHIELD involve activities that directly qualify for the R&D tax credit, including:

• Prototyping
• Studies, Demonstrations, Testing of Prototypes
• Experimentation
• Architecture Development
• Modeling, Simulation, and Analysis
• Weapons Design & Development

Contractors who are awarded SHIELD work are likely to perform experimental efforts that may qualify for the R&D tax credit, which provides a lucrative cash benefit that can help boost profitability and further fund innovation.

R&D Tax Credit Qualifications

Generally speaking, the term R&D can mean many different things depending on the context in which it’s used. For the purposes of the R&D tax credit, the term can be quite broad.A company can qualify for the R&D tax credit if it performs research activities that meet the following four-part test, written by Congress. The four-part test requires an activity that:

1. Intends to develop or improve a product, process, technique, formula, algorithm, etc.
2. Is technological in nature (e.g., rely on the principles of a hard science such as engineering, physics, chemistry, biology, etc.)
3. Involves technical uncertainty related to the capability, method, or appropriate design
4. Uses a process of experimentation (evaluation of one or more technical alternatives)

The Qualified Research Expenditures (QREs) generated through these qualified activities contribute to the credit calculation and consist of four categories: wages, supplies, contract research, and leased computing services.

Funded Work under the R&D Tax Credit

Many companies that perform work under the scope of a government contract often assume they do not qualify for the R&D tax credit due to external funding. While funded research is excluded from the R&D credit, the definition of what is “funded” is determined by who holds the financial risk and substantial intellectual rights of the work performed. However, determining who holds the risk and rights can be quite challenging to define without the guidance of an experienced tax professional.

Financial Risk

While there are a variety of contract types, government contracts generally fall into two categories: Fixed-Price (e.g. Firm-Fixed-Price) and Cost-Reimbursable (e.g. T&M, CP, etc.). Cost-Reimbursable contracts often do not satisfy the R&D credit’s financial risk requirement for the contractor because the structure commonly ensures the contractor will receive payment for every hour worked and material purchased. Alternatively, Fixed-Price contracts are typically more aligned with the credit’s financial risk requirements because the contractor’s payment is contingent on the success of their activities (e.g., achieving certain design requirements or milestones).

Contractors can sometimes satisfy the financial risk requirement for work performed under cost-reimbursable contractors if there is a contractual risk of not being paid for their efforts. Examples could include contracts with certain clawback provisions, which could lead to the withholding of payment if the deliverable does not meet certain contract specifications or requires the correction of contractual deviations without further compensation. However, this determination must be made on a case-by-case basis and can vary significantly based on various provisions and clauses in the underlying contract.

Substantial Rights

When determining if a government contractor satisfies the substantial rights requirement for the R&D credit, “substantial”is the operative word. Companies do not need to maintain 100% of the rights to the results of development for the activities to qualify for the credit – they only need to meet the threshold of “substantial” rights.

The threshold of “substantial” rights is nuanced but can generally be confirmed through the absence of any agreement where the contract provides the customer with exclusive rights to the research performed. Carefully reviewing the available contracts is critical to determining who holds the substantial rights to development.

Final thoughts: The Value of the R&D Tax Credit

Tens of thousands of businesses claim the R&D tax credit each year, many of which perform work under government contracts. Companies can apply the credit as a dollar-for-dollar reduction in federal income or, in some cases, payroll tax, generating substantial cash savings and lowered tax liabilities.

However, accurately determining eligibility and calculating the credit can be highly complex, and the additional nuances of government contract work can increase that complexity. To ensure your credit is properly calculated – avoiding both understated benefits and potential compliance issues — partner with an R&D credit specialist with the right experience and capabilities.

Please connect with your advisor if you have any questions about this article.