Posted by Jeffrey Feingold on 05.11.22
The federal tax code has included research and development (R&D) tax credits to businesses for more than three decades. For most of that time, large companies, primarily in in the software, pharmaceutical and high-tech industries, have recognized their qualifying activities and taken advantage of these R&D tax incentives.
Contrary to a common misperception, however, R&D tax credits are not limited to scientists and laboratory-based researchers. In fact, many of the activities conducted by architecture firms qualify, and the benefit can mean tens of thousands of dollars in tax savings. In fact, many of the architect’s day-to-day activities naturally fall within R&D for tax purposes because the architectural industry is based on innovation and functional design.
Provisions in the federal tax code offer over $10 billion in credits to businesses each tax year. Yet less than 33% of companies that qualify for the federal R&D tax credit actually utilize it, due to misconceptions about qualification and the complexity of necessary documentation.
PATH Opens the Door to More Architectural Businesses
When Congress enacted the Protecting Americans from Tax Hikes (PATH) Act of 2015, it included R&D tax credit provisions for payroll tax offsets for qualified small businesses and offsets toward alternative minimum tax (AMT) for eligible small businesses. These permanent changes to R&D tax credits opened the door to include small and midsize companies that previously did not generate enough federal income tax liability to take advantage of this tax incentive. In many ways, PATH expanded the focus of the credit from rewarding revolutionary industry developments by larger companies to also benefitting smaller companies that have invested time and resources in the development of new ideas and improvements to overcome technical uncertainties.
Which Activities Qualify?
R&D tax credits represent a money-saving opportunity overlooked by countless architecture firms simply because they aren’t aware the tax credit is available to them, or they misunderstand its intent.
Viewing qualifying activities in terms of new and improved designs, concepts and processes, architects will likely find that many of their innovative activities will be eligible for valuable R&D tax credits that they can use to reinvest in their business.
The following are examples of qualifying activities:
One caveat to keep in mind: The R&D credit doesn’t apply to research after a product or design was commercially produced or the duplication of an existing business component.
A four-part test determines which activities constitute qualified research.
Documentation
Any claim of the credit must be supported by detailed and accurate documentation of the amount of time spent by employees working on the qualifying activity, how much they were paid, records demonstrating that the activity satisfied the four-part test, and so on. The good news is that most architecture firms already use a time-tracking and project documentation process, so the process for claiming the credits is often straightforward.
Find Out if Your Activities Qualify
The R&D tax credit can be a lucrative incentive for architecture firms. And given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your firm qualify for major cash-saving federal and state tax credit opportunities.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, read our e-book: The Business Owner's Guide to R&D Tax Credits.
You may also contact us at (800) 260-4138, or please leave us a message below.
