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Since this is National Small Business Week (September 12 to September 18), we’d like to mention the fact that our CEO and founder, Julio Gonzalez, established Engineered Tax Services in 2000 specifically to serve small businesses—to look out for the little guy.
“I founded ETS to reward the great behavior of small business owners with substantial tax benefits,” he said. He noticed that commercial real estate tax incentives were available to the wealthy, but not to small businesses. As a result, he created Engineered Tax Services, a specialty tax advisory firm, to level the playing field.
“In college, I was impressed by how people in real estate could use tax laws to accumulate wealth,” he added. “It was a narrative that was underutilized by the rest of the world. You can become very wealthy through tax-intelligent planning and real estate. I learned early on, you can make investments, but you can’t write them off. You can’t write off a bad stock loss or expense a bond. But if you buy real estate, you can save huge sums of money with tax studies that open the door for depreciation, cost segregation, and energy-efficiency tax deductions, and you gain dividends in the form of rent.”
During the pandemic, Julio has gone out of the way to protect small businesses.
“I’m proud every day that during the pandemic, we were able to deliver a tremendous amount of tax benefits to small business owners via Employee Retention Tax Credits and other strategies to keep their doors open and keep up hope during unparalleled times,” he said. “We helped all these small business owners survive.”
His focus on small business drives his overall corporate strategy.
“We implement tax tactics that help the common person,” he said. “Our goal is to educate our audience of accounting firms, so small businesses can be aware of these benefits, including minority firms that don’t have the resources and aren’t aware of the tax laws.”
This April, because it’s helped small businesses thrive, Engineered Tax Services received an award from the National Minority Business Council that recognized its role as a prominent minority-owned business in the United States. Founded in 1972 and headquartered in New York, the Council is committed to expanding opportunities for small, minority, and women business owners.
Today the accounting profession is under pressure. Slimmer profit margins. Intense competition. The pandemic. The changing role of the partner. And most of all, a workforce shortage. Fewer young people coming out of college are choosing to become CPAs.
Is there a solution? Actually, there’s a combination of solutions (such as making the crucial shift from compliance to advisory), but here, in the interests of space, we’re just going to focus on one: using the magic of technology to create faster results, open new avenues, and yield new solutions.
While accountants are wizards of the bottom line, they’re too often burdened with outdated technology, which is insufficient to meet the demands of our post-pandemic world. How can CPAs keep up? A recent Accounting Today article highlighted three technological tricks that CPAs should take advantage of.
Post-COVID, remote work is the order of the day. Since the pandemic broke, on-premise infrastructure just doesn’t cut it, especially since accountants are forced to use a wide variety of software tools.
How do you unite a distributed remote team? The cloud is the one ring that binds them all. With a cloud-based infrastructure, CPA firms can drive up the productivity and efficiency of their teams by providing easy, instant access to the data and tools they need, wherever they’re located. Another advantage: it’s easier for employees to use for onboarding new tools and processes than with an on-premise legacy system.
When in doubt, automate! Automation is a key catalyst for the vitally needed transformation the accounting profession needs to make to go from compliance to advisory—that is, instead of merely helping client comply with current tax laws and file returns, CPAs should take a more pro-active stance and demonstrate their value as trusted advisors, showing their worth as strategic partners.
But to make the switch, you must spend less time on manual tasks and focus more on business strategy and other non-finance tasks. An article published by Sage reports 93% of finance workers declare they’d be happy to automate their daily accounting tasks via technology. Also, with tight budgets and a workforce that’s always expected to do more with less, automation is crucial to meeting deadlines and productivity goals.
It’s easy for CPAs—or anyone in the financial services field—to blindly jump on the bandwagon and grab the new glittering, cool tech tool. But do you really need that 3-D printer (or whatever)? Take a minute and consider your needs clearly before you invest serious money. While a tool might seem irresistible on first place, could it, in the end, complicate your work ecosystem or make tasks more difficult?
If you’re an accountant, you already have a burdensome workload. How can you keep up with contemporary demands? First, identify your own urgent needs and reverse-engineer what solution will fit. Although this can be challenging with a global remote workforce, it will also save crucial time and money later on.
Remember “Let your fingers do the walking”? That was Bell Telephone’s slogan pre-cell phone, encouraging American to use the phone to accomplish tasks instead of legwork. In the same way, CPAs can tame technology as a labor-saving method to take their businesses to the next level and make the all-important transition from compliance to advisory.
The real estate world has an innovative tool at our disposal — tokenization — that can facilitate making illiquid assets (like real estate holdings) liquid.
Real estate has almost always been considered a relatively safe investment. As Mark Twain famously said, “Buy land, they aren’t making it anymore.” After all, whatever happens in the stock market, people will always need a place to live and work. Yet real estate transactions also tend to be some of the most complex and expensive, rendering real estate itself relatively illiquid.
In recent decades, securitization has had some success in making real property interests easier to transact. But a new method of engaging in such transactions promises to go even further in transforming the purchase, holding and sale of real property: tokenization.
Tokenization of real estate creates digital securities ownership interest in the entity that holds and/or operates the underlying real estate assets. These securities use blockchain technology to enhance the investor experience, and as regulation permits, they will feature an expanded role for blockchain in the lifecycle, including real time or near-real time settlement. An issuer can utilize a variety of blockchain networks, such as Ethereum or Tezos. Digital securities are typically governed by a smart contract that’s programmed to be compliant with securities regulations.
Tokenization and blockchain offer many advantages over traditional methods of dealing in real estate. These include increased liquidity and transparency, materially faster transaction settlements, reduced settlement costs, enhanced security and simplified management.
Tokenizing real estate is the process of issuing digital equity securities in a holding company that owns the real estate asset. More generally, digital securities can be structured to represent a variety of ownership and economic interests in an underlying asset; it can be equity in a company that owns the asset, an interest in debt secured by the real estate, a stream of income based on cash flows from the asset or an interest in the capital growth of an off-plan project. The types of the real property involved can also vary widely, including single-family homes, multifamily structures, office buildings, warehouses, retail spaces, timeshares and everything in between.
Although this may sound like something from an episode of Mr. Robot, several models of real estate tokenization are being actively developed, such as: ownership of real estate through a special purpose vehicle, shares in real estate funds, investments in and loans to developments and tokenized REITs.
Access to Capital
Because property developers can fractionalize a property efficiently, more investors can participate, resulting in more capital flowing into a project.
More Accurate Pricing
The asset’s price will approximate its real market value, since illiquidity discounts will be significantly decreased. Potential investors can easily trade many assets at low fees in the secondary market.
Real-Time Pricing Information
Because paper-based systems that share data asymmetrically have been eliminated, investors can uncover better trading deals more swiftly.
Since the blockchain-based system is regularly updated, investors know the underlying property’s value in advance.
The Reduction of Overhead & Faster Settlement
With tokenization, intermediaries such as brokers and agents are eliminated. This is because the platform’s entire operations have been converted digitally and been automated.
Participants can invest in multiple properties internationally and enjoy higher returns.
Decreased Opportunity for Fraud
Investor confidence is increased, since no one can change a transaction recorded on the blockchain network.
A Collateral-Backed Investment
Since real estate tokens are financially supported by real-world assets (tangible property), they offer less risk than unstable cryptocurrencies or potentially questionable initial coin offierings (ICOs).
Thanks to regular checks and balances that ensure stability, the security token’s value doesn’t fall below the real estate asset’s net asset value (NAV).
One company that’s been successful in tokenizing real estate is tZero, a leader in blockchain technology for capital markets, which works to tokenize and trade digitally-enhanced securities securely. Its stated goal is “democratizing access to private market investments.”
After digitizing securities (by creating a digital capitalization table that can be efficiently managed with an innovative smart contract), tZero also offers a regulated trading platform, through its regulated broker-dealer subsidiaries, where issuers can make their assets available for trading. (These securities aren’t purchased with or quoted in bitcoin or another exotic cryptocurrency, only in traditional cash. However, tZero is working on regulatorily-compliant mechanisms for investors to be able to convert their crypto into cash that the broker-dealer would then accept.)
“Tokenizing real estate has many advantages,” said Solomon Tesfaye, tZero’s vice president of business development and capital markets. “One is controlling liquidity. If you don’t want a certain party to own more than 10% of your security, for example, through set contracts, you can obtain tailored liquidity. You can also create a ‘sandbox’ where only certain investors are allowed to trade your security.”
“If you’re a real estate owner, you can digitize your building or real estate portfolio and sell shares in it as if you were a large public REIT on the NYSE,” continued Tesfaye. “We’re seeing on our platform 30 times the historically balkanized and opaque liquidity of traditional private markets.”
He cited a useful case study. Last year, tZero was approached by a luxury ski resort in the Western United States that was interested in tokenizing its real estate assets. Last summer, it took tZero less than two months to completely digitize the capitalization table for the holding company holding the real estate asset and onboard the holding company’s securities for trading. This resort continued to maintain continuous automated liquidity during the pandemic with market-driven pricing that was untouched by the COVID-19 dislocation some other publicly-traded hospitality companies suffered.
The idea of harnessing blockchain technology to promote liquidity in real estate markets was the brainchild of Julio Gonzalez Jr., the founder and CEO of Engineered Tax Services, who has over 20 years’ experience in the commercial real estate sector.
“I partnered with tZero to bring tokenization to the accounting industry and its real estate clients to provide next-generation real estate services to the nation, just as I’ve done with cost segregation studies, 179D energy tax deductions, research and development tax credits to a wide variety of industries and 5G wireless cellular antenna installation,” he said. “Tokenization is yet another sign of how technology is revolutionizing the real estate profession. I see it as the democratization of access to asset classes. Now anyone with substantial assets — even collectibles — can convert those illiquid assets into liquid ones and trade them on a regulated trading platform as if they were shares of Apple or Amazon. It’s a potential game-changer for capital markets — and I think it’s a startling new development that could introduce substantial liquidity to U.S. and international real estate markets.”
WEST PALM BEACH, FL – August 24, 2021 – Engineered Tax Services, Inc. (ETS), the country’s largest licensed tax credits and incentives advisory firm, announced that effective today, Jeffrey Pawlow has been promoted to President to lead the strategic development and management of the Engineered Advisory family of companies, which includes ETS, The Growth Partnership, ABLE, and Engineered Technology Services. Pawlow is currently Executive Managing Director, Corporate Strategy & Go-to-Market Operations at ETS, and before ETS acquired The Growth Partnership and ABLE, he co-founded them.
“When I acquired The Growth Partnership and ABLE about a year ago, an unexpected dividend was the amazing people that joined the ETS family through this purchase,” said Julio Gonzalez, founder and CEO of ETS. “One of those people whose outstanding performance impressed me is Jeff Pawlow. Based on his ability to lead and execute and his relentless dedication to our collective enterprise’s overall success, I’ve realized he is the ideal person to become President and elevate our thriving companies, so they can achieve their true potential.”
Pawlow has been involved in the accounting world for 26 years. On four different occasions, he has been named as one of the CPA profession’s “Top 100 Most Influential People” by Accounting Today. He currently resides in suburban St. Louis with his wife Cindy, with whom he has four children. He earned a Bachelor of Science in Business Administration, Management from Creighton University.
“I am truly honored that Julio has chosen me to help guide his companies to the next level of success,” said Jeffrey Pawlow. “We’re poised now to take advantage of some very exciting opportunities. The Engineered Advisory family of companies offers a unique set of services when it comes to tax, real estate, and finance, and now we can show clients all the ways we can help them.”
Summary: In today’s podcast, Julio Gonzalez from Engineered Tax Services discusses some small business tax credits, tips, and tricks regarding tax credits that all small and large businesses should know. No matter your business size, it is crucial to spend time looking into the proper tax benefits for your industry.
For small business owners, it can be easy to not spend too much time focussing on tax benefits. Many small business owners on average pay the IRS more than they need to due to not claiming the proper tax write-offs. Small business owners should look to professionals that specialize in small business tax accounting instead of just utilizing your CPA that does your business taxes. Instead of viewing these professionals as a cost, view them as a smart investment. A tax accountant is different than the accountant who does your taxes. If the tax accountant has proper industry knowledge and experience, a great tax accountant can end up saving you a large chunk of money.
Small business tax questions can arise when businesses are unsure about how they can reduce taxes. Business real estate is a timeless tax-saving option with a plethora of benefits for small business owners that tend to go unnoticed by entrepreneurs.
So what are the benefits of buying property and a building as a small business? When you purchase real estate for business purposes, you can claim the whole purchase on your taxes. Furthermore, when you rent it out to tenants, you essentially get to pay your mortgage off with that money through rent.
This option is timeless as your real estate will be an appreciating asset, gaining value over time. If you keep up with the property needs, you can increase the value more that way. For example, if you choose to install renewable energy sources into your property, you can claim that as a tax write-off.
To break it down further, here is a quick recap of the various benefits to buying real estate a business owner;
Buying real estate can be a very wise investment if you are in it for the long haul and even if you are not ready to buy yet, knowing about real estate as a tax deduction is a wonderful knowledge to have
Originated provisionally by Congress in 1981 as Research and Experimentation credits, R&D tax credits are now permanent federal and state tax incentives meant to stimulate innovation, technical design, and product development and enhancement and keep the U.S. on the forefront of innovation. These tax credits reimburse companies that develop new products, processes, or inventions and offer a significant percentage back to the company for qualified research activities and qualified research expenses.
The problem is, many executives in the film and TV industries are unaware of the substantial tax credits available to them, or they don’t understand which activities qualify. Think of how dependent films and TV shows are on special effects alone, in the wake of the 1977 Star Wars revolution that unleashed dazzling special effects on thrilled moviegoing audiences worldwide. In addition, the film and media industries are constantly investing in new technological advances that can take the shape of improved camera lenses, sound recording technologies, and lighting systems. Production companies can save substantial amounts of money simply by claiming these tax credits.
It just so happens that there is a company that specializes in helping film and TV production companies make use of R&D tax credits: 1913 Media Group, which describes itself as “a vertically integrated film and television studio, centered around the creative development and financing of pre-sold film projects.”
“We do a tremendous amount of financial engineering as part of our film production,” said Joey DiFranco, president and COO of 1913 Media Group. “We’re project engineers who fiscally engineer film productions, and leveraging tax credits is a component of that. The big studios like Marvel are major financial engineers, but we’re bringing that knowledge down to the independent film space. We’ve found a sweet spot for this level of engineering: the sub-$10 million production base [independent films that cost less than $10 million]. Nobody in our space is taking advantage of incentives like R&D tax credits. Our job is to ask our creative clients, ‘How can we remove roadblocks?’ That’s why we offer financial engineering like R&D tax credits.”
DiFranco cited several examples of instances where film and TV production companies could make use of R&D tax credits. He explained that every film is represented by its own a short-cycle LLC, which protects the parent organization (Marvel, for example) from liability.
“Filmmakers are constantly undertaking tech development, software development, and process development—not necessarily for a specific film, but for the parent organization,” he said. “This is classic research and development for better processes and products. You’re literally reinventing the wheel for each film with visual effects, practical effects, and custom gear and equipment. You’re going through an ideation process that’s trackable, which you turn around and use on other productions. Our clients are always inventing ways to create a certain kind of cinematic impression and then applying them to these different projects.”
He added: “For instance, you might develop new check-in/check-out software for your film. You can license beyond that and sell your new software tool to others in the film and TV industry. There are very repeatable R&D tax credits being produced, but the makers don’t realize them. That’s the great thing about working with a partner like Engineered Tax Services, who are experts in the field.”
If you’re in the film and TV business, how do you know if you qualify for R&D tax credits? Just take this simple four-part test established by the IRS:
“If you’re in the film and TV business, don’t leave money on the table,” DiFranco said. “Those millions of unclaimed dollars could go a long way towards financing your next production!”
In the wake of the pandemic, these are challenging times for architectural firms, particularly regarding the field of commercial real estate. But there are tools you can access to give your firm the competitive edge it needs to triumph in today’s marketplace. One such tool is the AIA Leadership Academy: A Leadership and Business Development Program for Architects.
Consider taking advantage of AIA’s new flagship leadership development program, the AIA Leadership Academy, developed in partnership with The Growth Partnership (TGP), an executive coaching and advisory firm that’s a subsidiary of Engineered Tax Services, an AIA Innovation Partner.
This three-year program is designed for architects who are ready to advance their firms by learning critical business and leadership skills to grow their business, lead change and innovation, empower and engage people, and create immediate impact.
It’s the first—and only—multiyear program for architects that focuses on firm, professional, and community leadership. Expert instructors lead small classes (cohort-based classes) limited to 28 students. Students receive one-on-one personalized virtual coaching sessions.
The curriculum will teach you to lead across four key areas: managing yourself, your architectural firm’s growth, your profession, and your community. The program combines annual retreats, virtual classes, and individualized coaching. Sessions include knowledge-based lectures, facilitated exercises, panels, small- and large-group activities, success labs, best practice forums, and project-based assignments between sessions to promote problem solving and application-based learning.
Architects already have the technical knowledge and expertise to be successful, but interpersonal skills and leadership are an area that many professional service providers struggle with.
In addition to the development of leadership skills, it’s important for professionals to offer advisory services and suggestions to bring added value to clients. This can strengthen the client relationship and loyalty.
Differentiate yourself with value-added services
To achieve success as a leader in the architectural world, it’s important to focus not only on technical skillsets, but also to build your personal soft skills. You can act as an advisor to your clients by bringing to the table value-added services, such as a knowledge of incentives and benefits they can claim for projects you’re designing.
This can save your clients millions in tax dollars. For example:
These tax advantages bring substantial value to your clients. In addition, your firm could be claiming R&D credits and 179D deductions directly for some projects.
You can enhance your client’s bottom line by introducing the following tax strategies:
Winning clients by identifying hundreds of thousands of dollars in additional value
Clients can gain substantial tax savings in unexpected ways—but sadly, most CPA firms are unaware of these incentives, and because they require an engineer, they’re overlooked. When most architects hear “tax credits,” their eyes glaze over because they assume their CPA is supposed to handle anything tax-related. As a result, these incentives are left on the table.
Simple suggestions for tax planning might include:
Align yourself with strategic partners
With proper advice, your clients can pre-qualify for energy efficiency tax incentives stemming from 179D and 45L—and 179D’s new regulations make it much more challenging to qualify for. However, utilizing a strategic partner can make you shine. For example:
Yes, architectural firms are facing difficult times. But you’re not alone. The AIA Leadership Academy can help you develop leadership skills so your firm can achieve its full potential. In addition, Engineered Tax Services offers consulting and certification for these tax incentives and partners with hundreds of architectural firms across the United States to offer specialty tax services and consulting to help you achieve even greater success.
The Employee Retention Tax Credit (ERTC) was created to reward employers for retaining employees during the pandemic crisis, even when their businesses faced financial strain. This tax credit must be claimed before the June 30, 2021 filing deadline, and many taxpayers are realizing significant benefits.
Engineered Tax Services and its cohort Rockerbox are experts in identifying and claiming federal tax credits; and with their due diligence and tax knowledge, Rockerbox was able to obtain a restaurant owner in New Jersey over $618,000 in ERTC tax savings, while maximizing the value of both the ERTC and Personal Payroll Protection (PPP) loan programs for the client.
Here’s how it started: ETS Executive Vice President Heidi Henderson was contacted by a CPA client of over 10 years; who has a client that owns a multilocation restaurant business in the Northeast. The CPA firm, being an advisory-focused group, identified the potential benefit for its client and shared the client’s payroll files with Rockerbox.
“With ERTC, the first thing we do is prove the employer is eligible,” said Philip M. Wentworth, Jr., co-founder and CEO of Rockerbox. “You have to have less than 100 FTE [full-time equivalent] employees. We requested a 2019 1094-C from the client; it shows the IRS they’re compliant with Affordable Care Act and they’ve offered employees healthcare coverage. When we asked the CPA firm to confirm the employee listing, it turns out the client sent over the wrong year, 2018, not 2019!
“When they sent over their real 2019 1094-C, we saw immediately they had several hundred employees. Our hearts sank. It looked like they didn’t qualify. Then we figured these all couldn’t be full-time employees, so we asked how many hours each employee worked. We have a magical template that can do amazing things with databases. Our processors did the work, and they whittled down the part-timers from the list until we saw there were only 87 FTE employees! So the client qualified. We had the CPA firm redo the 1094-C form, and the client ended up with a $618,000 tax credit.”
Heidi Henderson pointed out: “Without that due diligence, that employer would not have had access to $618,000 in credits.”
But that’s not all we did for the client. In the wake of the pandemic, ERTCs and the Paycheck Protection Program (PPP) came out at the same time. Originally, if you got a PPP loan, you couldn’t claim ERTCs. But under the new law, employers who received PPP loans can claim employee retention credit for qualified wages not treated as payroll costs to obtain forgiveness of their PPP loan.
As it turns out, the client had received a PPP loan, but hadn’t filed for forgiveness.
“We applied the funds from the PPP loan to the client’s high-wage earners,” Wentworth said. “We maximized both programs. It could not be a better day for ETS and Rockerbox.”
He added: “Our fees are unique and 100% success-based, so we’re motivated to deliver. If we were being paid a fee, we would have walked away from this engagement, because the initial size of the employee list would have been a red flag; but since our fee is linked to our performance, we had an incentive to clean up the PDF employee list and uncover real value for the client.”
Additionally, this client’s payroll company had assumed they didn’t qualify, due to the number of employees, and the payroll company doesn’t investigate PPP status and ERTCs; it only uses an algorithm. “The payroll company would have left a lot of tax credits on the table,” Wentworth remarked.
Wentworth has calculated that as a result of the ERTC tax credits, the client’s cash flow will increase by 10-15%. “And with a higher cash flow, the client’s bottom line will improve, and their valuation will go up too,” he said.
“In my work, it’s wonderful to hear small business owners talk about their business and tell their story,” Wentworth said. “I’ve been fielding calls from prospects since 6:30 this morning—and I’m not complaining! It’s great thing to help small businesses thrive in America, especially in the wake of the pandemic.”
Please contact Engineered Tax Services for more information on qualifying for the Employee Retention credit or other possible incentives to optimize your income tax structure.
Engineered Tax Services (ETS) continues its relationship with celebrity pro athletes. First, it engaged two-time Super Bowl winner Ray Crockett, formerly of the Denver Broncos, to act as a wealth management advisor to fellow professional athletes and performing artists. Now ETS is sponsoring one of America’s up-and-coming pro golfers, Denny McCarthy, on his PGA TOUR. As of this writing, according to the Official World Golf Ranking, he’s ranked as the 161st best golfer in the world—an amazing achievement!
As part of the sponsorship, he acts as a brand ambassador for ETS, wearing the ETS logo on his golf shirt sleeve at PGA Tour events. He’s also making scheduled appearances on behalf of ETS, while engaging in marketing and social media campaigns to promote the partnership.
“We’re honored to be associated with such a stellar athlete as Denny McCarthy,” said Julio Gonzalez, CEO of Engineered Tax Services. “I know Denny personally, and he’s a wonderful person. We’re proud to be partnering with a rising star who exemplifies our values of hard work, perseverance, and professionalism in our drive to be leaders in our field. He’s a fantastic representative of ETS, and he’s an inspiration to us all. We’re excited to be a part of his story.”
Born in Takoma Park, Maryland, Denny McCarthy has been playing competitive golf since the age of 10, starting with the MAPGA junior tour. After playing varsity golf and basketball at Georgetown Preparatory School, he played college golf at the University of Virginia, where he was a two-time All-American. While a senior, he led the United States to victory in the 2014 World Amateur Team Championship, winning the Eisenhower Trophy. He finished tied for 42nd at the 2015 U.S. Open.
After playing in the 2015 Walker Cup, McCarthy turned pro and competed on the Korn Ferry Tour. During the 2017-18 season, he finished 12th place on the 2017 Korn Ferry Tour Money List. He finished number one on the 2018 Korn Ferry Tour Money List, winning the season-ending playoff event and earning exempt status on the PGA Tour for the 2018-19 season. He’s a renowned putter who led the PGA Tour in Strokes Gained Putting, for two consecutive seasons; his 2020 season performance ranked as the second-best putting season of the ShotLink era (since 2004). As of this writing, he’s 78th in the FedEx Cup standings.
“ETS is an ideal sponsor,” said Denny McCarthy. “We’re both based in Florida, and I’m thrilled ETS and Julio Gonzalez are so supportive of my golfing career. It makes all the hard work and preparation I put into my athletic performance worthwhile, knowing there’s an organization that believes in high standards so solidly behind me. Julio Gonzalez is a nationally recognized tax reform expert and a devoted friend of small businesses in America, and I’m proud to represent ETS and what it stands for.”
Check out Denny McCarthy’s PGA TOUR schedule.
R&D tax credits incentivize companies for innovation and technological investments. AIA partner Engineered Tax Services explores how three architecture firms are reaping the rewards.
Architects and designers can save tens of thousands of dollars for activities they are already conducting if they understand valuable tax reduction incentives available to them. Federal and state programs exist that reward firms for innovation and activities that overcome technical design challenges. The federal research and development (R&D) tax credit is a tool for driving such innovation and job growth.
The R&D tax credit is intended to incentivize companies to invest in innovation and technological investments so the U.S. can remain at the forefront of these advancements. Two-thirds of U.S. states also offer tax credits for R&D activities. The credit, which is designed to reimburse companies that develop new products, processes, or inventions, offers a percentage back to the company for qualified research activities and qualified research expenses. These savings can offset wages and salaries paid for qualified activities. A firm does not need to be large to qualify.
Many architects and designers are either unaware of the applicability of R&D tax credits to their firms or struggle to understand how the credit applies, if their projects or activities qualify, why they qualify, and how much the credit might be.
The qualitative four-part test for qualifying R&D research
A simple four-part test helps to determine which activities constitute qualified research according to criteria established by the IRS:
In this first example, consider how the design challenges for a residential home in Chicago met the four-part test to qualify as R&D research.
The architect entered into a flat fee contract to design a new home on a unique site with limited space and various geotechnical challenges. The client requested that the home be highly sustainable and exceed all energy-efficiency requirements. The property was on a septic system with no access to a city sewer; therefore, there was a significant amount of uncertainty as to what method to use to properly drain the site and what type of technology to apply.
The firm determined that a septic system would not work because the location was too steep, and it would not meet new codes. To combat this issue, the firm created a hybrid sewer system through a neighboring property to the closest sewer connection that traversed a change of 700 to 800 feet of elevation. The final design included a high-pressure system with a smaller line and a pumping station.
The next two examples demonstrate the potential value of the R&D tax credit incentive.
This Texas architectural firm specializes in commercial and public projects throughout the state, with each design being a unique “one-off” concept.
This small New York firm specializes in a mix of residential and commercial projects. Because of its small size, one large project may span a few years, which increased costs and credit values in those years.
Now that you know the value of the R&D incentive, how would your architectural/design firm determine whether it qualifies?
Claiming R&D tax credits requires a fair amount of documentation, so it’s important to seek professional help from a consultant with strong expertise in helping architects successfully claim these valuable tax credits. R&D experts will examine the fundamentals of your business activities—incorporating operations, engineering, financial, and tax expertise that results in more credits and meticulous documentation that is necessary to support your activities, costs, and credits.
R&D tax credits can be claimed each year. For firms that have never claimed the credit, there may also be credits available for the prior three years. If your company meets the standards outlined above, a discussion with an R&D expert may be worthwhile.