The architecture and engineering (“A&E”) industry is the lifeblood of innovative design and construction projects in today’s competitive global environment. A&E firms develop a nation-wide infrastructure and these new projects may qualify for valuable federal and state R&D tax credits. According to the latest U.S. Census Bureau, there are more than 80,000 A&E companies in the U.S. and a clear majority of these firms are not even aware that they are doing research and experimentation activities eligible for the credit.
Many A&E firms erroneously believe that they are not eligible for the R&D credit because they don’t realize their company performs research activities. In their mind, the R&D tax credit can only be utilized by high-technology or pharmaceutical companies discovering products that are new to the world. This is just not the case, as many A&E firms can and do meet the eligibility requirements as they only have to meet the very broad and general definition of “research” to satisfy the legal tests for the R&D tax credit. Specifically, the activity has to rely on a hard science; they need to develop a new or improved business component and engage in a process of experimentation in an attempt to overcome a technical uncertainty. Many activities of A&E firms fit that description.For A&E firms, one of the largest qualified research expenditures 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.
For example, when developing a new bridge structure, A&E firms initial activities might include feasibility studies, conceptual and schematic designs, and final designs. Within the project, activities will seek to provide new or improved functionality, quality, performance, or reliability of the bridge features. New bridge development incorporates the latest structural design techniques, as well as research into superior materials that demonstrate maximum strength and resistance to loads from wind, traffic, and ground movement.
For A&E firms that believe they have some research activities some companies still don’t 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. We disagree! 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 for the company.
To this end, A&E firms may have qualified expenses eligible for the R&D tax credit and savvy companies should perform a review of their current projects to determine which activities and expenses are eligible for these valuable incentives.
For more information on tax incentive programs available in your area, find your state below.
