Research and development (R&D) tax credits aren’t just for the technology, pharmaceutical and manufacturing industries. Architectural and engineering firms can qualify, too — oftentimes just through their everyday activities where they continuously develop new and improved designs, concepts and processes. And the more your activities qualify, the higher your tax credit amount could be.
What types of activities qualify?
You may not see what you’re doing on a day-to-day basis as a developmental or design-related activity worthy of the federal or states R&D tax credit, but architects and engineers regularly perform qualifying work without knowing it during design or pre-construction. There are many ways to qualify for the credit. Example activities include:
- Creating alternative design concepts to meet complex requirements
- Determining alternative structural designs
- Creating energy-efficient designs or using energy-efficient materials
- Achieving Leadership in Energy and Environmental Design (LEED) certification
- Developing appropriate water flow or plumbing systems or determining ventilation for a structure
- Design-build construction
- Developing electricity conduction systems
- Developing or using computer-aided design (CAD) modeling and testing to assess designs
- Creating optimal designs for lighting or acoustical qualities
What types of activities do not qualify?
While many activities do qualify, there are certain restrictions to be aware of. The R&D credit doesn’t apply to:
- Funded research
- Research performed after a design is commercially produced
- Contracts that guarantee payment for 100% of time and materials
- Duplication of existing components
How you get paid is just as important as what activities you’re performing. Typically, firms that take on what could be considered riskier projects have more qualifying activities carried out in concept design, schematic design, design development and value engineering phases and therefor receive higher R&D tax credits.
Can you take the credit in previous tax years?
If your firm hasn’t claimed the R&D tax credit historically, you can go back up to the past three tax years and claim the credit (so long as you have qualifying activities for each of those years).
Are there state R&D tax credits?
There are many states offering an R&D tax credit. Each state has its own calculation and requirements. For example, qualifying activities must be performed in that state.
The good news is, when you identify and claim credits at the federal level, this does not reduce the amount you can receive at the state level — meaning your tax credits are enhanced by claiming credits at both levels.
Working with a specialist in R&D tax credits
Unlike other tax credits and incentives, the R&D credits are heavily activities-based and require in-depth discussion regarding activities. And that’s where an accounting and business consulting firm like Wipfli comes in.
We work with architectural and engineering firms to determine whether they qualify for R&D tax credits. We discuss the activities you’re performing, assess the evolution of projects from beginning to end, and look at your contracts to identify any terms that would disqualify activities. We not only identify the activities and expenditures that qualify but also calculate the credit amounts for you.
We are also fully aware of the context around claiming R&D tax credits. The IRS is paying close attention to firms that claim the credits, and there have been several court cases in recent years regarding the credit. You’ll want to rely on a trusted business advisor with true expertise in the R&D tax credit area to ensure you are accurately claiming qualified expenditures for qualifying activities. The R&D tax credit can be a lucrative incentive for many architectural and engineering firms, but it’s also worth having specialists on your side to assist you.
To learn more about Wipfli’s R&D tax credit services, click here.
Webinar: Research and Development Tax Credit Opportunities