Architectural and Engineering (A&E) companies can realize the benefits of the R&D tax credit if they know which research activities are eligible for the credit. Several activities that are conducted by A&E firms might, at first review, seem like qualified activities, but are actually ineligible types of company activities.
Below are some of the key activities that are not eligible architecture and engineering activities that A&E firms need to be aware of when identifying and calculating their research activities and credits.
Under IRC Section 41(d)(4), certain research is specifically excluded from the definition of “research.” These activities include: research conducted after commercial production or build and research related to the adaption of an existing business component to a particular customer’s needs.
For example, activities conducted after the beginning of commercial production are not qualified research. If the activities are conducted before the business component is developed to the point where it is ready for commercial sale or use, those activities would be eligible as they meet the basic functional and economic requirements of the taxpayer for the components’ sale or use.
In addition, A&E firms need to know that other non-qualified research relates to the duplication of an existing business component; surveys, studies, activities related to management functions, and similar activities; research conducted outside the United States or outside the state (if claiming the state R&D tax credits); research in the social sciences, art, or humanities (e.g. the soft sciences); any research to the extent funded by any grant, contract, or by another person or government entity.
Specifically, activities relating to reproducing an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information about the business component are not qualified research activities.
Lastly, qualified research that might be conducted when performing architectural and engineering activities may not be eligible if it’s related to some managerial functions of the firm (except the direct supervision of qualified research) or techniques, including such items as preparation of financial data and analysis, development of employee training programs and presentation materials, developing management organizational plans, and management-based changes in the production processes (such as rearranging work stations on a production line. Furthermore, these exclusions are geared to non-technological changes such as market research, testing, or development (including advertising and promotions), routine data collection, and ordinary and routine testing or inspections.
While A&E firms may have some qualified activities and related expenditures that are eligible for the R&D tax credit, there are many exceptions to the rules of what activities are qualified research and what activities are excluded activities. It is important for A&E firms to work with a tax expert who knows the differences between qualified research activities and non-qualified activities in order to maximize their R&D tax credits and overall tax savings.
For more information on the R&D tax credit, download the complimentary guide below.