The R&D tax credit can save firms thousands of dollars. AIA partner Engineered Tax Services explores the myths that might be holding you back from taking part.
The Research & Development (R&D) tax credit is a permanent federal tax incentive meant to stimulate innovation, technical design, and manufacturing within the US. There is a common misperception that R&D is limited to scientists or others working in laboratories, but that is not true; companies of all sizes across many industry sectors, including architectural and engineering firms, can now qualify for these dollar-for-dollar tax credits.
The R&D tax credit is designed to reimburse companies that develop new products, processes, or inventions. For architects, such activities may include designing a master plan or developing an innovative building system.
While the Tax Cuts and Jobs Act of 2017 made many changes to our tax code, it retained the current permanency of R&D credits, underscoring the importance of U.S. investments toward innovation. Companies no longer need to develop a product or process that is new to their industry; it only needs to be new to them. Yet, less than one-third of eligible companies realize they qualify. Misconceptions about the R&D tax credit get in the way of claiming up to tens of thousands of dollars of the tax credits that companies deserve.
Here are six common misconceptions:
1. My CPA said it would trigger an audit.
The average tax return rate of audit is 1%. On a current-year, timely filed return claiming the R&D tax credit, there is typically not an increase. For firms that are retroactively claiming a credit for the prior two years, filing an amended return only increases the risk of an audit by an estimated 1%.
2. I don’t qualify for R&D because I don’t do anything innovative.
Federal R&D tax credits have been available to businesses for more than three decades. However, many architects simply don’t realize the tax credits are available to them or don’t understand which activities qualify. Have you developed schematic designs? Overcome site features in your site plan? Developed unique energy-efficient features? These are just a few of the numerous activities that are considered innovative and qualify an architect for the R&D tax credit. Additionally, more than two-thirds of U.S. states also offer valuable tax savings through their own R&D tax credits. See how three firms leveraged the credit.
3. I don’t have the time to gather the required documentation.
While it is true that the qualification process required to earn R&D tax credits is quite detailed, a qualified tax advisor can help you gather the essential information, such as wages, time spent on related activities, and materials and supplies to support the qualifying research. The average internal time, depending on firm size, ranges from six to 12 hours.
4. I don’t do public projects, so I can’t qualify for R&D tax credits.
It’s not uncommon for architects to think R&D tax credits are limited to design of public buildings. That’s because the Section 179D Energy-Efficient Commercial Buildings Tax Deduction, another valuable opportunity for tax savings, has such limitations. However, both public and private projects are eligible for R&D tax credits as long as your firm can prove you have overcome design challenges and can meet the four-part test.
5. We don’t have time tracking in place, so I can’t calculate and qualify R&D activities.
Time tracking is a great way to know what members of your firm are spending time on, how much, and what each project is costing; however, even when architectural firms don’t use time tracking, you can work with an R&D tax credit expert to retroactively analyze and identify activities. That said, when time tracking is available, it streamlines processes and reduces hours needed for preparation.
6. We don’t know how to determine the potential benefit of R&D tax credits for our firm.
Would you believe that less than one-third of eligible companies realize they qualify for R&D tax credits? And many of the companies taking the credit are not claiming all the credits to which they are entitled. At Engineered Tax Services (ETS), we partner with architects, engineers, and contractors nationally to help them calculate the potential for significant tax benefits. The complimentary R&D tax credit analysis will help determine your potential benefit.
By taking advantage of the R&D tax credit for activities you are already doing, you have the opportunity to access dollars that will offset wages and salaries paid for qualified activities. R&D tax credits can result in tens of thousands of dollars of savings, even more than $1 million for an architecture company.