Case Study: R&D Tax Credits for a Multidisciplinary Design Firm in the Southeast United States

Narrative

In 2024, a multidisciplinary design firm based in the Southeast United States, specializing in architectural design services across commercial, hospitality, education, healthcare, and residential markets, engaged Engineered Tax Services (ETS) to conduct an R&D tax credit study. Originally established in the 1970s as an architecture firm, the company has evolved into one of the largest and longest-standing design firms in the region, maintaining four offices and employing over 100 professionals.

The company’s recent R&D activities centered on creating innovative architectural solutions that push the boundaries of creativity while addressing complex technical challenges. These efforts included developing sustainable design strategies, experimenting with new materials like terra cotta rainscreen systems, solving structural complexities in buildings with non-traditional geometries, and adapting historic structures to meet modern performance standards while preserving their character-defining features. The firm’s approach involves iterative design processes, advanced computer modeling, and systematic experimentation to achieve maximum functionality and performance for each unique project.

Objective

The primary objective of the R&D tax credit study was to identify, quantify, and document all qualifying research activities and associated expenditures (QREs) to maximize the company’s federal R&D tax credits. ETS aimed to:

• Optimize the credits using the Alternative Simplified Credit (ASC) method to maximize the benefit
• Thoroughly analyze the company’s architectural projects against the IRS’s Four-Part Test to ensure eligibility
• Accurately calculate QREs, focusing on wages for qualified services performed by architects, designers, and technical staff
• Prepare comprehensive documentation to substantiate the R&D tax credit claims

Methodology

ETS employed a systematic, engineering-driven approach to conduct the R&D tax credit study:

1. Technical Interviews & Project Review: Conducting detailed interviews with principals, architects at various levels, interior designers, construction project managers, and other key personnel to understand the technical challenges, experimentation processes, and objectives of each architectural project.
2. Documentation Analysis: Reviewing the company’s project accounting system that codes employee hours by project, phase, and activity, along with technical documentation, project plans, and payroll records to identify and substantiate QREs.
3. Application of the Four-Part Test: Evaluating each identified R&D activity against the four statutory requirements:
   • Permitted Purpose (New or Improved Business Component)
   • Technological in Nature (Relies on Principles of Hard Science)
   • Elimination of Uncertainty (Technical Uncertainty at the Outset)
   • Process of Experimentation (Iterative Testing and Evaluation)
4. QRE Calculation & Credit Computation: Quantifying all eligible QREs and calculating the available federal R&D tax credits using the Alternative Simplified Credit method based on the provided financial data and relevant tax laws.

Qualified Research Expenditure Allocation

Qualifying Wages

Total Amount: $1,711,574

Percentage of Total QREs: 100%

Description: Includes direct wages for employees engaged in qualified research activities such as architectural design development, structural problem-solving, sustainable design implementation, construction document preparation, and direct supervision of research activities. Key personnel included architects, interior designers, landscape architects, technical designers, and construction project managers.

Qualifying Supplies

Total Amount: $0

Percentage of Total QREs: 0%

Description: Contract research costs were not included in this research credit study.

Qualifying Contract Research Expenses

Total Amount: $0

Percentage of Total QREs: 0%

Description: Contract research costs were not included in this research credit study.

Class Life Details:

Summary

The R&D tax credit study performed by ETS for the multidisciplinary design firm in the Southeast United States successfully identified significant qualifying research expenditures. By meticulously applying the Four-Part Test and analyzing project details across six business components, ETS was able to substantiate QREs totaling $1,711,574.

This comprehensive study resulted in a federal R&D tax credit of $110,260 (net of the 280C reduction) for the 2024 tax year. These credits provide a valuable dollar-for-dollar reduction in tax liability, enabling the company to reinvest in future innovation, expand its design capabilities, and maintain its position as a leader in the regional architecture market. The study demonstrates that architectural firms engaged in solving complex design challenges through systematic experimentation and technical innovation can realize substantial benefits from the R&D tax credit program.