With many architectural firms expanding their research and development efforts nationwide, architects may not be taking full advantage of the research and development (R&D) tax credits they can potentially apply for. Misconceptions generally surround how these credits apply, what activities or projects qualify, why they qualify and how much credit they will get in return for their development initiatives.
Background on R&D Tax Credits
The R&D tax credit has been extended 15 times with expansions in its definition and application since the act was originally adopted in 1981. A revision to the code (IRS Code Section 41c) in 2014 included a “Four-Part Test” to help businesses identify activities, costs, and industries that qualify for R&D tax credits.
The “Four-Part Test” specifies qualifications as:
- Any activity that creates new or improved function, performance, reliability, or quality to business components;
- Technological in nature and associated with physical or biological science, engineering, or computer science
- Designed to discover information to eliminate uncertainty in capability, method, or design;
- Activities that include a process of experimentation, or evaluating alternatives to achieve a result. Some examples include modeling, simulation, or systematic trial-and-error.
Why Give These Credits?
Why exactly does the IRS give tax credits to help fund some overhead costs of research and development projects? It’s an incentive for businesses that invest in innovation that may increase technological advancements in the U.S. It also incentivizes businesses to continue with research and development each year to help with steady growth for the country.
The R&D credit factors in a company’s income tax offset based on allowable wages (hours spent working on projects or activities) and supply costs (which typically don’t apply to architectural firms) for the projects and activities that would qualify. These qualifying projects and activities usually occur during the first three stages of architectural design: conceptual design, schematic design, and design development. There are some cases where the construction document phase will apply as well.
Examples of Qualifying Activities Include:
- Alternative design concepts;
- Construction that uses unique materials that help with both structural and energy efficiency
- Tests for acoustical, lighting, and visual features (e.g., movie theaters, auditoriums);
- Using technical methods and materials for the use of sanitary and safety measures (e.g., medical treatment centers, hospitals, food preparation or food manufacturing facilities)
What Does Not Qualify?
Research activities that have been funded or contracted with a 100% payment guarantee for all time and materials needed, no matter the project outcome, do not qualify as R&D projects. Prototype projects that lack innovation or exclusive design elements have a very limited chance of qualifying for these credits as well.
How Are These Credits Calculated?
Calculating a company’s R&D tax credit is a complex process that requires an overview of the company’s eligible costs averaged out over prior years and calculated as an increase over those prior years. Companies who have increased their costs starting at 20% will receive, on average, a 5% – 6% net federal credit. In 2018, 28% of architecture firms who employed over 50 people applied and received R&D credits according to a biannual AIA Firm Survey.
When And How Do You Get These Credits?
Companies can claim R&D tax credits each year. For companies who have never claimed these benefits before, the first step you can take to receive your credit is calling a qualified tax group to help you navigate through the qualified research, paperwork and more.
At National Tax Group, we help you tackle this process step by step. Let us guide you through receiving your R&D credit so you can increase your potential cash flow as soon as possible. Give us a call at (561) 257-3436 for your free qualification assessment.