With election season upon us, politicians of all stripes are debating the best fixes to get business moving again. While it’s uncertain at this stage which party will hold sway and whose policies might be enacted, architecture firms—many of them small, closely held enterprises—are wondering how tax and financial policies might shift in the coming years. It’s a critical question for firms struggling in a depressed market for design services. David M. Sullivan, 47, a CPA who serves architecture and engineering clients as a partner in Woburn, Mass.–based DiCicco, Gulman & Co., talks about what to watch for as the debates continue.
The Internal Revenue Service recently released a comprehensive advisory memo focusing on architecture and landscape architecture firms. This Audit Technique Guide pinpoints the areas that an IRS agent might probe during an audit. It may sound grim, but an auditor probably won’t be knocking on your door tomorrow, Sullivan says. It does suggest, though, that the IRS might be looking at architects more closely.
Take a look.
Given the current political discussions focusing on changes to the tax law, it’s a good time to step back and evaluate your firm’s tax structure to make sure it aligns with your long-term goals and strategies. Tax structures can be tricky to change, so evaluate what might work best for your firm. “About two-thirds of architecture and engineering firms are S-corporations or LLCs, which are good ways to go, tax-wise, for closely held businesses,” Sullivan says.
Plan for changes.
One thing is certain: The Bush administration tax cuts on ordinary income and capital-gain rates will extend through 2012. But unless something changes, there will be a big automatic increase in 2013, Sullivan points out. A tax plan for 2012 should consider all potential future rate changes. “So if you can manage a major financial event, like selling your business, it’s best to do it before the end of 2012 from a tax perspective,” he says.
Head for the exits.
More than 75 percent of architecture and engineering firm owners are 55 or older, which means that many of these people will be looking to sell their assets and shares as part of a retirement plan. If the capital-gains tax rate, now at 15 percent, rises, then the incentive may be greater for such firm owners who are approaching retirement to cash out. “These people would want to go early and get their money now and pay less tax before it’s too late,” Sullivan says.
Take advantage of current tax credits, such as the energy-efficiency tax deduction. You may be able to take tax deductions for newly constructed buildings for federal, state, or local government clients that meet certain minimum energy requirements. That deduction relates to factors such as the building’s envelope and lighting. And it can really add up: for a qualified building with 100,000 square feet of space, a tax deduction of up to $180,000 (at $1.80 per foot) may be available. “Always consider this if you are doing government work,” Sullivan says.
Upgrade the office.
You don’t have to wait and see what new taxes or cuts the next administration suggests in order to save on taxes. If your office is looking dowdy or you are behind the technological curve, think about investing in new equipment, computers, furniture, and fixtures—to brighten up the office or catch up with the best standards in design software. For qualified assets purchased in 2011, you can expense the first $500,000 of your purchases in one year instead of depreciating those assets over longer periods of time according to accelerated tax depreciation tables.
Do some research.
Tax credits for research and experimentation can apply to architecture and engineering firms when the services involve a process of experimentation. The credit is calculated as a percentage of qualified contract expenses. “It’s a dollar-for-dollar tax credit that can create real meaningful cash flow to the business,” Sullivan says.
Accept the inevitable.
“We don’t know how politics will change the rules of the games,” Sullivan says, “but with a big election coming up in 2012, whatever happens, you can be sure the rules of taxation will change in the future.”