Architecture and engineering firms are one of the largest users of Research and Development (R&D) tax credits in the United States. This is because many of the activities required to design and construct a new building, improve and/or expand an existing building, or provide general consulting and engineering services typically quality for R&D tax credits. This means that there are hundreds of thousands of dollars on the table just waiting to be claimed by architecture and engineering firms. However, many firms may not realize or understand this tax incentive and its applicability.
What is an R&D Tax Credit?
An R&D tax credit is a dollar-for-dollar tax credit that reduces the tax of regular corporations (Schedule C corporations) or the shareholders of a pass-through entity such as a subchapter S corporation or an LLC. R&D tax credits are available at the federal level and additive R&D tax credits are provided by almost 40 states. As of January 1, 2016, the R&D tax credit has become a permanent part of U.S. tax law.
R&D tax credits are available for your architecture and engineering firm's open tax returns. This typically includes the current tax year and the prior three tax years. In other words, in addition to 2021, tax credits can still be used against your company’s tax liability for years 2018, 2019 and 2020.
Which Activities Qualify?
The major eligible activities that generate R&D tax credits for architecture and engineering firms include the creation of new and improved products, new and improved processes, as well as new and improved software.
The major costs that drive R&D tax credits are:
- Design, engineering and technical wages (this may include CAD work).
- Third-party contractor costs for engineering, testing and model creation.
- Supplies and raw material consumption related to prototype and model creation.
- Third-party software development and integration costs.
How are A&E Firms Using R&D tax credits?
Architecture and engineering firms are making increasing investments in new and improved products and technology, most commonly including computer aided design software, building information modeling, virtual/augmented reality, and simulation and computational analysis software. While not directly credit eligible, they are tools that oftentimes assist in R&D eligible activities. Whether it’s Internet of Things (IoT), Big Data or Artificial Intelligence (AI), as new technologies emerge to help solve technical problems within the industry, companies will have to explore and integrate these emerging technologies into their toolset in order to remain competitive. These initiatives may also be R&D credit eligible activities. Conversely, R&D tax credits may allow a company to pursue these initiatives to begin with.
Before the credit was enhanced, many tax planning activities at architecture and engineering firms were limited to year-end scrambles to pay higher bonuses or writing off hastily arranged equipment purchases. This was typically driven by a desire to reduce taxes. The problem with this type of tax planning is that it starves the organization of the funding accumulation needed to hire more promising professionals and invest in the technology needed for future growth. The R&D tax credit acts to reduce the firm's or partners' current tax obligations and incentivizes the firm to innovate.
As mentioned, many of the activities performed by project architects, engineers and other design consultants are R&D intensive. Because wages for technical employees are the largest driver of the R&D credit, architecture and engineering firms are an excellent candidate for generating R&D tax credits. For example, a structural engineer may spend a significant amount of time performing load analysis using simulation software to test the feasibility of a design under various conditions and stresses. This time spent is R&D eligible, and a portion of that employee’s wages will be calculated into the credit.
Sample A&E firm results are shown below:
How Should My Firm Get Started?
The Deltek-R&D Tax Savers partnership is designed to make the process straightforward and seamless. Deltek can provide the software accounting classification categories and time management data needed to calculate the credit, while R&D Tax Savers’ interdisciplinary staff of experienced tax attorneys, CPAs and a variety of engineers will prepare the required annual R&D tax credit documentation study. With 40 years of experience, R&D Tax Savers can capture and deliver the maximum R&D tax credit opportunity for your firm. Having completed R&D tax credit engagements for numerous leading architecture and engineering firms, we are very familiar with the industry and the implementation of qualified R&D activities.
Learn more about R&D Tax Savers.
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