The pros and cons of R&D tax credits for architects
Architects may be able to save tens of thousands of dollars by leveraging federal R&D tax credits. AIA partner Engineered Tax Services explains the benefits and explores some of the common misconceptions.
Federal research & development (R&D) tax credits have been available for more than three decades to incentivize companies that invest in innovation and technological investments. This is a permanent federal tax incentive meant to stimulate innovation, technical design, and manufacturing within the US. Today, two-thirds of US states also offer tax credits for R&D activities.
Architects and designers may be able to save tens of thousands of dollars for activities they are already conducting if they understand valuable tax reduction incentives available to them. Architectural projects can require extensive research at multiple points of the design process, including schematics, conceptuals, and design development. Those passing the IRS’ four-part test to meet the regulatory requirements may be eligible for R&D tax credits.
From our years of working on this issue, we estimate that less than one-third of eligible companies realize they qualify for the R&D tax credit. Reasons range from lack of information to misperceptions about the tax incentive. With that in mind, the following pros and cons around R&D tax credits should help architects make an informed decision about working with their specialty tax professionals to conduct an R&D tax credit study.
R&D tax credits: Pros
- Gain access to tax refunds. R&D tax credits can provide a significant source of revenue for your architecture firm. Additional cash flow, especially during an economic slowdown, is essential to avoid any interruption in current project work and ongoing innovation. R&D tax credits, designed to reimburse companies that develop new products, processes, or inventions, offer a significant percentage back to the company for qualified research activities and qualified research expenses. These savings can offset wages and salaries paid for qualified activities. R&D tax credits can result in tens of thousands of dollars, even more than $1 million, for a qualifying architecture firm.
- Three-year lookback allows for retroactive benefits. Architects can capture benefits for 2017, 2018, and 2019 retroactively, and generate cash refunds now against taxes paid or choose to be paid going forward.
- R&D underscores your firm’s commitment to innovation and unique design. By qualifying and being approved for R&D tax credits, and reinvesting that money into further innovation and unique design, you can strengthen your reputation as a firm that is on the forefront of advanced design concepts and technological advancements.
- Credits allow more investment into innovation or “passion projects.” Architects, who are creative by nature, often have passion projects—design ideas that motivate and inspire them. R&D tax credits can be put to use to help fund these projects so that these dollars are reinvested into future designs. Better yet, qualifying activities employed to get these projects off the ground can qualify for additional R&D tax credits.
- Analyze your company’s time and costs for innovation. The exercise of calculating R&D credits can be insightful for firms, allowing them to clearly see how much time and cost they invest in innovation each year. The analysis also helps better organize time tracking and documentation to help claim higher amounts each year as those processes improve.
R&D tax credits: Cons
Many of the common concerns about claiming R&D tax credits are easily surmountable or are based on common misconceptions. Here are some of the most frequent objections we hear:
- Documentation requirements are overwhelming. Claiming R&D tax credits calls for a fair amount of documentation required by the IRS; however, your firm can seek professional help from a consultant with strong expertise in helping architects successfully claim these valuable tax credits. For example, experts at Engineered Tax Services dig deeply into the fundamentals of your business activities — incorporating operations, engineering, financial, and tax expertise that results in more credits and meticulous documentation that is necessary to support your activities, costs, and credit.
- Claiming R&D tax credits can trigger an audit. Clients will often ask ETS whether the IRS looks more closely at firms applying for tax credit dollars. Here’s the good news: With current-year, timely filed returns, we have not seen any increase. When firms that retroactively claim the R&D tax credit, we have found that filing an amended return increases the risk of audit by roughly 1%. There is a direct correlation between the amount of your defensible credit and the expertise of the advisor performing the tax credit study.
- Entity type can restrict use of R&D tax credits. How an architecture business is formed will affect how R&D tax credits can be used. C corporations retain the R&D tax credits in the company and cannot use the credits if the corporation doesn’t pay tax. At S corporations and LLCs, the R&D tax credits flow down to partners who get individual refunds (if applicable). AMT limitations could apply, and should be considered and discussed with your CPA before pursuing qualifying credits.
- The process is too time consuming. While it is true that the qualification process required to earn R&D tax credits is quite detailed, a qualified R&D 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. Our process begins with an R&D tax credit qualification analysis.
- Time tracking is needed. Without a doubt, 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.
As you can tell, even the R&D tax credit “cons” can be resolved with the help of a specialty tax expert. Architects and engineers are often unaware that their projects can qualify for R&D tax credits. You may not realize that the innovative processes and activities you undertake could increase cash flow, increase competitive advantage, and produce a significant reduction to future years’ federal and state activities.
To learn whether your projects qualify for R&D tax credits, please contact Heidi Henderson of Engineered Tax Services directly at 801-564-4464 or firstname.lastname@example.org. You may also download our free e-book "The Architect's Guide to R&D Tax Credits."
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