Architectural and Engineering (“A&E) companies often fail to realize that they can take advantage of the credit for increasing research activities (“R&D Tax Credits”) under Internal Revenue Code §41 without even being aware of the program. Some of the common misperceptions and areas often overlooked involve the following:
1) 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. For example, some A&E firms assume 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” from a tax perspective to satisfy the legal tests for the R&D tax credit. Some of the work performed by in-house architects, design engineers, computer-aided design (“CAD”) designers and similar technical personnel are performing research activities for their company.
2) For the A&E firms that believe they have some research activities still might not want to pursue the R&D tax credit because they are convinced the credit calculation is too complicated and burdensome to qualify for the tax credit. A common question by A&E firms is that while they feel they have some qualified activities, they don’t understand how the calculation is derived and might believe the benefit will be too small to pursue. Many times, this is not the case. A&E firms have good time tracking systems to record the qualified and non-qualified time of their employees. Other than the core architects and engineers many other additional activities such as direct supervision performed by managers and direct support activities conducted by administrative personnel might be considered research activities on qualified R&D projects, thereby increasing the amount of the credit.
3) Lastly, a common misperception is that A&E firms do not have the documentation required to identify and substantiate the R&D tax credit claim. There is no one document that is required by companies to claim the R&D tax credit. For example, many A&E firms develop pre-build design documents that can be used to show that alternative designs were drafted and developed before the construction of the building or structure. These design documents, while not written specifically for the R&D tax credit, can be utilized to show that there was technical uncertainty at the beginning of the project, satisfying one or more of the legal definitions of “research”. Furthermore, A&E firms generally have very good project tracking systems to keep track of the time and expenses related to their projects. This information can be used to supplement the documentation and substantiation requirements for identifying and claiming the research expenses of the company.
In conclusion, many A&E firms are unaware of the opportunities they have to claim the R&D tax credit. The R&D tax credit is available to many companies and industries and understanding the many rules and regulations will help A&E firms to determine what activities are qualified and how to properly document these expenses.
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