Architectural and Engineering (“A&E”) firms may be able to take advantage of the credit for increasing research activities (“R&D Credits”) under Internal Revenue Code §41, if they know what activities and expenses are eligible for the credit. The two key questions taxpayers should be asking themselves are 1) what activities at my company are eligible for the R&D credit and 2) are the R&D expenditures related to those activities properly identified and captured.
Many A&E firms erroneously believe that they are not eligible for the R&D credit because they do not think their company performs research activities and the credit can only be utilized by high-technology or pharmaceutical companies discovering products that are new to the world. However, many companies, including A&E firms, only have to meet the broad and general definition of “research” to satisfy the legal tests for the R&D Tax Credit.
For A&E firms, one of the largest qualified research expenditures (“QREs”) is wages paid to in-house architects, design engineers, computer-aided design (“CAD”) designers and similar technical personnel who perform research activities for their company. Frequently A&E firms design, build and manage small to large construction projects and part of this process might be performing qualified research activities such as developing schematic designs, designing master plans, developing plan and elevation drawings, creating construction documents, designing building facades, LEED certification, CAD/CAM design work, and BIM modeling.The following is a typical A&E project workflow process and their potentially qualifying stages:
- Pre-Design Bidding (Some qualifying potential)
- Includes preliminary design
- Initial concept brainstorming
- Few QREs
- Schematic Design (Some qualifying potential)
- Demonstrate preliminary design/concept
- Initial concept development, evaluation of solution/ideas/hypotheses
- Budgetary considerations
- Significant QREs
- Design Development (Some qualifying potential)
- More detailed design
- Mock ups to prove concept
- Significant QREs
- Construction Design (Minimal qualifying potential)
- Few QREs
- Contract (Construction) Management (Minimal qualifying potential)
- Few QREs
Furthermore, frequently A&E firms have good time tracking systems (e.g. Deltek) to record the qualified and non-qualified time of their employees. However, some of these systems fail to recognize additional qualified activities such as direct supervision performed by managers and direct support activities conducted by administrative personnel who are engaged in research activities but are not required to track their time to projects. In these cases, A&E firms should develop separate time surveys to account for these supervisory and supporting roles conducted by in-house employees.
While A&E firms may have qualified expenditures eligible for the R&D Tax Credit, there are many rules and regulations that determine what activities are qualified and how to properly document these expenses. As you evaluate these potentially qualified expenditures, consider what types of documentation you have to support the claim; is it sufficient or are there areas that are lacking and need more substantiation. The more information and support you have to justify your R&D Tax Credits, the more success you will have if and when these claims are under examination.
For more information on how your A&E firm may qualify for R&D tax credits, please reach out to a certifed tax consultant at CTI.
