The Research and Development tax credit is a federal incentive for all US Businesses that engage in research and development activities. Some businesses engage in these activities more than others, and architecture firms are among one of the top placeholders. Claiming these on your taxes will give you more money to reinvest in your business.
Architecture firms are often unsure whether or not their research and developments endeavors and expenses are eligible and can miss out on claiming these credits. However, the IRS recently published a clarifying list of guidelines for what counts, and what doesn’t.
Here are some activities that may qualify your architectural firm for the federal R&D tax credit:
- Researching structure design
- Researching design alternatives
- Researching new materials to improve energy efficiency
- Using building information modeling
If you employ:
- Project Architects
You may also be eligible for research and development tax credits.
More specifics on the IRS guidelines for R&D credits can be found in Section 41 on the IRS website.
In order for research and development endeavors to qualify for the tax credit, all firms will need to pass the R&D tax credit four-part test.
- The Section 174 Test: All costs must be an R&D expense in an “experimental or laboratory sense” and be in direct relation to the business.
- The Discovering Technological Information Test: The aim of the research must be to clear up uncertainties related to improving or developing a business component. The research process must also use computer science, biological or physical sciences, or engineering, according to the IRS.
- The Business Component Test: A business must undertake research with the goal of developing a new or improving an existing business component. Products, computer software, formulas, processes, inventions, or techniques are all considered business components.
- The Process of Experimentation Test: The research process must
- 1. Identify the uncertainty related to the improvement or development of a business component
- 2. Identify a minimum of one alternative to eliminate the uncertainty
- 3. Identify and perform a process of alternative evaluation.
What kind of research expenses qualify for research and development credits are also regulated by the IRS. Qualified research expenses include:
- Employee wages: The salaries of employees who engage in qualified services, which means directly supervising, or directly supporting qualified research activities.
- Supplies: Any tangible property used for qualified services.
- Contract research expenses: Sixty-five percent of contract research expenses that a company incurs to a non-employee that performs qualified research activities.
While all of these things can be used to obtain an R&D tax credit, there are some things that you cannot use to claim the R&D tax credit. Activities that are not excluded from R&D credit are:
- Research after the start of commercial production.
- Adapting a business component to fit the needs of an individual customer.
- Any management functions-related research, studies, and surveys.
- Internal-use software.
- Research that took place outside the US, Puerto Rico, or another US possession.
- Research in social sciences.
- Research funded through grants, contracts, or a third party.
All in all, parsing out what activities your firm engages in, or what kind of research it conducts, can be claimed during tax season for a research and development credit can be confusing. Although there are some resources online, like the IRS web page, they can be hard to navigate and even harder to understand. At National Tax Group our team of tax experts are here to help you maneuver through complicated tax language. We specialize in research and development credits and want to help your firm optimize your tax returns. Call us or visit our website to learn more about how we can help and get your free benefits assessment today!