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R&D Tax Credits: A Guide for the AEC Industry

If you’re a member of the Architectural, Engineering, and Construction (AEC) industry, you know that your industry is responsible for maintaining and upgrading America’s infrastructure—a key priority in the U.S. today. 

But are you aware that the federal government and 35 U.S. states offer a research and development (R&D) tax credit that can reimburse you (a company in the AEC industry) for up to 10% of your eligible R&D costs? Created in 1981 in response to Japanese competition, R&D tax credits keep the U.S. a world leader in technological progress by rewarding companies that innovate through developing new products, processes, or inventions.

Valid IRS AEC R&D Tax Credit Expenses 

What expenses does the IRS recognize as eligible for the credit? By and large, the R&D tax credit is a jobs credit—a wage credit. Payroll expenses make up the majority of R&D tax credit claims. Overall, here are the major R&D expenses that the IRS views as valid:

  1. Design, engineering, and technical wages, which may include CAD work
  2. Third-party contractor costs for engineering, testing, and creating models
  3. Supplies and raw material used to produce prototypes and models
  4. Third-party software development and integration cost

Which of Your AEC Activities Qualify for the Credit?

  • Creating new or improved designs for structures
  • Creating preliminary designs and development plans
  • Creating preliminary computer-aided design (CAD) modeling and testing
  • Creating schematic designs
  • Evaluating various design alternatives
  • Designing the foundation and earthwork for site conditions
  • Creating new internal-use software applications to interact with customers and vendors
  • Creating unique functional and energy-efficient designs
  • Obtaining Leadership in Energy and Environmental Design (LEED) certification
  • Geotechnical engineering
  • Foundation design and engineering
  • Structural design and engineering
  • Facade design and engineering
  • Design and engineering for mechanical, electrical and plumbing (MEP) installations
  • Building information modelling (BIM)
  • Materials engineering
  • Designing temporary structures such as scaffolding, falsework, and formwork
  • Value engineering

In addition, the IRS requires that your research and development pursuits pass this four-part test.


How Can R&D Tax Credits Benefit Your AEC Company?

The tax savings you obtain from R&D tax credits can firm up your capital position, enabling you to reinvest the saved funds in vital business development. Here are four significant benefits to applying for the credit:

  • It immediately reduces your income and/or payroll tax liability.
  • You can bank valuable tax credits to apply against your future income tax bills.
  • It increases your business valuation.
  • It frees up capital for your business—a great help in today’s uncertain economic times.

Important Facts About R&D Tax Credits

  • R&D tax credits don’t only apply to successful projects. If your attempt at innovation didn’t succeed, you can still win the credit.
  • You don’t have to develop a product or process that’s new to your industry. What you create must only be new to your company.
  • You can capture R&D tax credits for the current tax year and for the prior three open tax years. If you have performed qualifying activities in the past, this could deliver substantial tax savings to your business.  
  • Did you miss the tax deadline for filing, but now you realize you could have applied for the credit? Simply file an amended return to file you claim. 
  • If your business brings in $50 million or less in gross receipts, you can use your R&D tax credits to pay off your Alternative Minimum Tax (AMT)

Getting an R&D Tax Credit Analysis to see if you qualify is the first step!

eBook: The Architect's Guide to R&D Tax Credits

This comprehensive e-book is designed to help you recognize which of your activities qualify for R&D tax credits! 

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R&D Tax Credit Case Study for Specialty Manufacturer in Oregon

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