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.
About the R&D tax credit
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.
Potentially qualifying activities for architecture firms
Many architects and designers are either unaware of the applicability of R&D tax credits for architects and 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.
- Examples of qualifying activities include:
- Developing schematic designs
- Designing master plans
- Developing unique energy-efficient features
- Developing planning and elevation drawings
- Designing and developing unique building facades
- Designing building systems
- Designing innovative building shape and form
- Overcoming technical uncertainty with building or site locations
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:
- Permitted purpose: The activities must relate to new or improved business components that improve function, performance, reliability, or quality.
- Technological in nature: The activity performed must fundamentally rely on principles of engineering.
- Elimination of uncertainty: The activity must be intended to discover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a product or process.
- Process of experimentation: The taxpayer must engage in an evaluative process that is capable of identifying and evaluating more than one alternative to achieve a result. This may include modeling, simulation, or a systematic trial-and-error methodology.
R&D Tax Credit Case study: Chicago residential home
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.
Case study: Architecture Firms in Texas and New York
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.