Defense Contractor Case Study

Overview

When a defense contractor developing advanced military systems came to Sycamore, the documentation that would most clearly demonstrate their R&D activity was classified. They couldn’t hand it to an IRS auditor. They had been told by others that defense contractors often receive only partial credit — that the IRS would accept only initial design work and deem the rest ineligible. They knew that wasn’t the full picture of what their engineers actually did, but they didn’t know how to prove it. They called Sycamore because we had done this before.

The Client

A defense contractor that engineers advanced military systems under contract for a U.S. government agency. The company’s work required developing new technology to meet military requirements that had never been met before.

•        Defense & advanced military systems

•        Work performed under classified government contracts

•        Engineering labor, contractor costs, and related qualifying expenditures across all contracted work

•        Previously advised that R&D credits would be limited to early-stage design work only

Challenges

Three problems converged at once.

Classified Information. The work was genuine, sophisticated R&D — engineering new technology to meet military requirements that had never been met before. But the project files that documented that work were classified. They could not be handed to an IRS auditor.

Passing the 4-Part IRS Test. Demonstrating technological discovery, genuine uncertainty, and a process of experimentation — without access to the underlying classified project files — required a methodology that most R&D credit firms had never built.

Partial Credit. The company had been told their credits would be limited to early-stage design work — a fraction of their actual R&D investment. They suspected that was wrong. Initial design never becomes final design. The iterations, failures, testing, and discovery run through the entire project. They needed someone who understood that, and could prove it.

Deliverables

  • Sycamore’s technical writing team built project-level R&D reports using what was available without touching classified material: government contracts (which are public record), structured interviews with engineers exploring what they tried, what failed, and how designs evolved, and independent research into the nature of the technical challenges involved. The reports showed the full arc of each project — not just its starting point — and demonstrated in non-classified language how the entire work met the R&D tax credit statute.

  • The Digital Audit Library contained everything needed to defend the claim under audit:

  • R&D Study Methodology Report — how projects were selected and assessed, and why

  • Contract legal briefs for each of the qualifying contracts

  • Project-level R&D write-ups for all qualified contracts, with citations to public-record contracts and interview findings

  • Accounting workbooks detailing all qualified expenses

  • Read Me First document — orienting the IRS auditor to the claim and allowing them to evaluate its merits quickly

    Nothing in the library required access to classified material. Everything the IRS needed to evaluate and approve the claim was there from the start. All contracted work was qualified as eligible R&D: $9 million in qualified project costs, $700,000 in federal R&D tax credits, and $150,000 in state R&D tax credits.

    Customer Quote

“Initial design never becomes final design. The R&D runs through the whole project — and that’s exactly what Sycamore’s team documented. They walked the line to both give the IRS what it needs while not disclosing sensitive information.”