Tackling the profit challenge through tax credits
Former architecture CFO Robert Pratzel and AIA partner alliantgroup examine how architecture firms can recoup thousands of dollars by leveraging the R&D tax credit.
Architecture firms often have difficulty achieving consistent and satisfactory levels of profits. This is due to a variety of factors, but perhaps most significant are fees being subject to wide swings as business cycles shrink and expand, which, in turn, can have a dramatic impact on capital spending for building projects. This issue is exacerbated by the fact that most firms focus on specialties rather than diverse practices, making them more vulnerable to shifts in the economy.
Helping the firm achieve adequate capitalization is a primary responsibility of the CFO, which includes implementing the most effective income tax strategy. One of the tools my firm takes advantage of is the Research and Development Tax Credit, which offers the advantage of materially increasing profits without interfering with the traditional exercise of decreasing costs.
Identifying work that qualifies
There is a huge opportunity for architecture and engineering firms to claim the credit for day-to-day work performed. Some examples of activities, improvements, and innovations eligible for R&D tax incentives include:
- Developing unique energy-efficient features
- Designing master plans
- Developing schematic designs
- Developing planning and elevation drawings
- Designing functional site plans to incorporate or overcome the site plan features
- Developing construction documents
- Designing and developing building façades
- LEED certification
- Designing building systems
- Designing site orientations
No matter the size or industry of the project, there are common activities that can qualify for this innovation-based incentive. Intuitively, with every design project being unique and requiring consideration and testing of several design solutions to solve complicated construction issues, the concept of research and development makes as much sense for architecture as it does for other industries, if not more.
Here are two examples from alliantgroup that demonstrate how architects are putting the R&D credit to work:
An architecture firm was able to claim more than $240,000 in federal credits by developing a new and improved architectural design and construction process for a client. The company analyzed the scope of the projects, including the design and development of office, industrial, retail, medical, and high-tech structures. Each project required designs with new or improved functionality, reliability, durability, or performance. Afterward, they moved into the design and evaluation phase, improving the design when technical issues arose. Numerous technical issues occurred due to the material used during the project, requiring the company to assess and improve the design.
Another firm was hired to design a luxury apartment complex and an adjoining five-story parking structure. The four-story complex included 173 dwelling units with eight different floor plans. The firm determined the optimal design for the least amount of fault line involvement, designing a five-story edifice around the parking structure. They experimented with several alternatives, including placing the pool area at the fault line (since it occupied a substantial amount of the parcel) and modifying the front elevation of the property near the beach to ensure the building was structurally sound. For their efforts, this firm received nearly $90,000 in federal credits.
Every design firm, regardless of size, should investigate the potential for this significant source of capital. Not doing so puts the firm at a competitive disadvantage. Due to the potential for a material benefit being made available, it is crucial to engage with an experienced outside consulting firm to manage the process and offer support should the IRS challenge the calculation.
To learn more about the R&D tax credit, visit alliantgroup.com.
Robert Pratzel is senior financial advisor with HOK, one of the world’s leading architecture and design firms, where he formerly held the position of chief financial officer and treasurer for 26 years.
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