Remaining competitive in an ever changing global environment while maintaining or increasing the firm’s professional reputation and prestige drives architects and engineers to continuously develop new and improved designs, concepts and processes. Architectural and engineering firms generally perform these development and improvement processes on a regular basis. However, the cost of this constant development may be restrictive. In order to help mitigate these costs and maintain global market competitiveness, federal and state governments provide incentives in the form of tax credits. The most powerful of these tax incentives is the federal tax credit for increasing research and development expenditures (the R&D credit).
There are four criteria – the four-part test - that are considered when qualifying R&D activities. Each activity must meet the four-part test in order to include the associated taxable salaries and wages, supplies, and/or contract research in the calculation of the tax credit. These activities must only be evolutionary to your company, not revolutionary to the industry.
1. The activity must be technological in nature. The activity must be based on principles of the following hard sciences:
- Computer science
- Physical sciences
- Biological science
2. The activity must be for a permitted purpose. The activity must involve the creation of a new or improved level of:
- Cost reduction
3. The activity must involve the elimination of uncertainty. The activity must explore what was not known at the start of the project:
- Capability uncertainty – Can we develop it?
- Methodology uncertainty – How will we develop it?
- Design uncertainty – What is the appropriate design?
4. The activity must involve a process of experimentation. Substantially all of the activities must include elements of experimentation:
- Evaluating one or more alternatives
- Performing testing or modeling
- Examining and analyzing hypotheses
- Refining or abandoning hypotheses
Examples of qualified research activities for architectural and engineering firms can include:
- Determining alternative structural design
- Determining alternative materials with which to construct a structure or parts of a structure (e.g. pre-stressed concrete, glass)
- Determining alternate means of assembling or fastening component parts of a structure
- Developing alternative water flow or plumbing systems
- Improving or determining appropriate ventilation for a structure
- Developing alternative electricity conduction systems
- Developing or improving lighting within a structure
- Improving acoustical qualities of a structure
- Environmental impact analysis
- Toxic waste and other waste disposal processes integrated into the structure
The federal R&D tax credit can provide a powerful monetary incentive for architectural and engineering firms that perform R&D activities. The additional cash flow generated by the R&D credit can be the difference between success and failure.
Our dedicated R&D professionals can help you make the most of your R&D investments. While minimizing the disruption to day-to-day operations, we conduct a thorough review of your R&D activities and identify the credits available to you. To bring you the highest quality R&D services, we first determine if a tax credit study is right for your organization. If so, we will:
- Identify and qualify your R&D activities
- Calculate your maximum tax credit benefit
- Organize and assemble the necessary supporting documentation
- Position your organization to effectively account for future tax credits
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.