Architecture Research & Development Tax Credit Study
How can architecture qualify for the credit?
The R&D tax credit (officially “Credit for Increasing Research Activities”) is a dollar-for-dollar reduction to your tax liability and can amount to large savings, not just this year, but retroactively as well. Despite being a huge benefit to architecture companies around the country, the credit is often overlooked by both big and small companies. From pre-design meetings and schematic design to design changes and adjustments during construction administration, there are qualified activities throughout an architect’s development process. Our R&D credit specialists stay current with relevant IRS whitepapers, regulations, and case law. This accounting and legal knowledge coupled with extensive experience working with architecture and civil engineering companies gives us the expertise to assist any architecture company with their R&D credit claim.
The internal revenue code, section 41, outlines the requirements for the R&D credit, however, the high-level requirements for an activity to qualify can be summarized by the “four-part test” as explained in the right column.
If your activities satisfy this four-part test, the associated wages, supply costs, and/or third-party contractor expenses could qualify towards the tax credit. We often see the credit amount to 10% of those qualified expenses.
Example of qualified activities
If three architects, each with a salary of $100,000 in 2020 (combined $300,000), spent the entirety of 2020 developing new architecture designs for hospitals and churches, the tax credit for their development efforts could amount to $30,000. That means approximately $30,000 less in taxes owed for 2020. If these credits are not used in the tax year they are generated, they can carry forward up to 20 years.
The example above involves three employees dedicating all of their time, however, any employees involved in the development efforts associated with the development of the designs are eligible for the credit. From meetings with owners to discuss the specifications and requirements of the facility to evaluate the appropriate materials, a variety of activities and expenses associated with the development efforts can be taken via the R&D tax credit.
In 2020, Calvetti Ferguson completed a 2016-2019 R&D study for a full-service architectural, planning, and design firm located in Fort Worth. In 2019, the firm employed 7 individuals with an annual payroll of $400,000 and revenues ~$1,000,000. Their key focus is mixed-use, commercial, healthcare, financial, religious, and animal care projects. Their services included mechanical, electrical, fire protection, civil/structural engineering design projects around North America. Ultimately, the R&D study resulted in a dollar-for-dollar federal tax benefit of $50,000.
Commonly qualified activities in architecture:
- Development of designs and concepts for new buildings or improvements to existing structures
- Evaluation of materials to meet structural reliability requirements
- Design of acoustic, lighting, and visual features to meet unique performance requirements of facilities such as movie theaters or churches
- Development of sterile features in medical or research facilities
- Evaluation of designs to optimize energy efficiency and achievement of LEED certification
The Four-Part Test
- Technological in nature: Development must rely on the principles of hard science (Mechanical/ electrical/industrial engineering, Physics, Biology, Chemistry, etc.).
- Permitted purpose: Must develop a new or improved product, process, formula, invention, software, or technique for performance, functionality, quality, or reliability.
- Eliminate uncertainty: During the development of the “business component”, you must encounter uncertainty regarding the final design, the methodology of achieving the desired outcome, or the capability of achieving the desired outcome.
- Process of Experimentation: To overcome the uncertainty, you must evaluate one or more design alternatives systematically. often this is done via systematic trial and error, modeling, simulation, and/or software (such as SolidWorks, AutoCAD, BIM, etc).
Calvetti Ferguson works with mid-market companies, nonprofit organizations, and high net worth individuals across the country. Regardless of the complexity of the compliance, assurance, advisory or accounting need, our team stands ready to assist you. Please complete the form below, and we will follow up with you shortly.