Gray, Gray & Gray, LLP
If you think the Research & Development Tax Credits offered by the federal government are just for high technology, life sciences or computer software companies, you may be missing out on a financial opportunity for your architectural or engineering firm. This is particularly important in light of recent tax changes.
Starting in 2016 small businesses (defined as businesses with less than $50 million in gross receipts) are now permanently able to claim the R&D credit against their alternative minimum tax (AMT), thereby removing a barrier that prevented many companies from taking advantage of the credit in the past. It is estimated that the removal of the AMT barrier will result in a 10-fold increase in the number of small businesses that can utilize the R&D Tax Credit.
This includes many architectural and engineering firms, who may qualify for an R&D credit because “research and development” perfectly describes much of the work they do on a regular basis. Design professionals are continually seeking to improve processes, develop new construction methods, and create new ways to solve old problems. This is particularly true as more and more building designs incorporate energy saving, sustainable, and LEED certified systems, which require additional work.
Changes in the tax code have expanded the R&D Tax Credits to include this range of innovative work being done by architectural and engineering design firms. If an activity passes a four-part test, the associated taxable salaries and wages, supplies, and/or contract research can be used in the calculation of the tax credit. Here are the test criteria:
- The activity must be technological in nature and based on scientific principles. This is an inherent part of most design and engineering work.
- The activity must involve the creation of a new or improved level of function, performance, reliability, quality, durability, or cost reduction. That is the underlying task for most design work.
- The activity must eliminate uncertainty in design, methodology and capability. Functionality, reliability and redundancy are watchwords in the design field.
- The activity must include a process of experimentation by evaluating alternatives, performing tests or modeling, and examining and analyzing hypotheses. Identifying and testing processes and systems are part of the job for architects and engineers.
The four test criteria describe much of what an architect or engineer undertakes every day in designing new structures and systems. Specific examples of qualified R&D activities for architectural and engineering firms can include (but are not necessarily limited to):
- Developing energy efficient systems and features
- Designing and developing building facades
- Achieving LEED certification
- Designing master plans
- Developing schematic designs
- Developing planning and elevation drawings
- Designing a functional site plan to incorporate or overcome the site plan features
- Developing construction documents
- Designing building systems
- Designing site orientations
- Designing building shape and form
- Determining alternative structural design
- Determining alternative materials with which to construct a structure or parts of a structure (e.g. pre-stressed concrete, glass)
- Determining alternate means of assembling or fastening component parts of a structure
- Developing alternative water flow or plumbing systems
- Improving or determining appropriate ventilation for a structure
- Developing alternative electricity conduction systems
- Developing or improving lighting within a structure
- Improving acoustical qualities of a structure
- Environmental impact analysis
- Toxic waste and other waste disposal processes integrated into the structure
Benefits Can Be Sizeable
Identifying activities that qualify for federal R&D Tax Credits takes a little time and effort. You’ll need to work with a professional who can quantify and justify the selected activities, then prepare and file the required supporting documentation.
But the payback can be substantial in terms of reduced tax bills that free up cash that goes right to a firm’s bottom line. In the first two years the R&D tax credits were available (2016 & 2017) our firm generated approximately $11.5 million in credits for clients in the architectural and engineering fields. Some recent examples from firms both large and small:
- An architectural firm with annual sales of $6.2 million and labor costs of $1.7 million had qualified consultant and research expenditures of $2.4 million, resulting in $195,000 in R&D tax credits.
- An engineering firm with annual sales of $2.3 million and labor costs of $1.8 million earned $84,000 in R&D tax credits.
- An architectural firm with annual sales of $430,000 and labor costs of $72,000 had qualifying activities that totaled $92,000, resulting in R&D tax credits of $16,500.
If you failed to take advantage of the R&D credits on your recent tax returns (2016-2018) it is not too late. A “lookback” study can be undertaken and tax returns for those years amended. The cost of amending a return is typically a fraction of the benefits generated by the tax credits.
Bradford G. Carlson; Paul J. Gerry, Jr., CPA, PFS; Kevin F. Howley, CPA; and Martin E. Prendergast are members of the Architecture, Engineering & Design Practice Group at Gray, Gray & Gray Certified Public Accountants and Advisors in Canton, Mass. (www.gggcpas.com)