The Rules is a monthly series covering important regulations in a clear manner for architecture, engineering, and construction professionals.

As in many sectors, architecture firms are still grappling with the economic impacts of the COVID-19 pandemic, from slowed work to evolving regulations. Firms should be aware of newly available opportunities for deductions as they prepare their 2020 tax filings.

The Singularity of 2020
This year, many companies benefitted from loans offered through the federal Paycheck Protection Program. “The entire PPP program has proved to be a constantly moving target,” says Martin Prendergast, an accountant at Canton, Mass.–based Gray, Gray & Gray. At the time of this article’s publication, no deduction for expenses paid by PPP funds is permissible on 2020 tax returns, even if the loans have not been officially forgiven by the end of 2020, according to the Internal Revenue Service.

Any business with a PPP loan that has been forgiven—or is reasonably expected to be forgiven in the future—cannot deduct any expenses paid with those funds on the 2020 tax filings. This provides a massive tax-planning wrinkle that firms should consider before year-end. It also likely eliminates any strategic rationale for postponing applying for loan forgiveness since the IRS has taken this firm stance. Firms should be prepared with organized records of how they spent those borrowed funds, Prendergast says. They should also contact their lender to start the forgiveness process.

Benefit from the CARES Act Provisions
Prior to 2020, firms were likely profitable due the strong economy of the last few years; these profits likely generated tax liabilities. For 2020’s taxes, Prendergast says that offices should consider revisiting their previous tax years because the CARES Act has afforded a five-year carryback of any net operating loss (NOL) generated in a taxable year between Jan. 1, 2018 and Dec. 31, 2020. For example, firms currently experiencing financial distress may find that while they sustained losses this year, they have opportunities to amend prior year returns to re-allocate current year losses and receive refunds from past profitable years where tax liabilities were due. “Bottom line, as cash flow crunches hit home and 2021 work pipelines slow, it may be time to discuss with your accountant taking advantage of NOL carrybacks and other relief strategies that are available,” Prendergast says.

As cash flow crunches hit home and 2021 work pipelines slow, it may be time to discuss ... taking advantage of net operating loss carrybacks and other relief strategies that are available.

Yaury Jattin, an accountant and principal based in Kaufman Rossin’s Miami office, explains that before the CARES Act, a business could use an NOL to offset 80% of its taxable income (up to the amount of the NOL available). With the CARES Act, for tax years 2019 and 2020, taxpayers are now able to offset 100% of their taxable income with an NOL generated beginning Jan. 1, 2018, and prior to 2021. Before the CARES Act taxpayers could only carry losses forward—no carrybacks were allowed.

Revisit the R&D Tax Credit
In order to minimize their 2020 tax liability on income, firms can also check several things. Louis Guay, a Boca Raton, Fla.–based principal of Kaufman Rossin’s R&D Tax and Cost Segregation Services, says firms should look into deductions such as the R&D Tax credit, as many projects pursued by architectural firms involve qualified research activities and could generate a dollar-for-dollar tax credit. An innovative technology research project could also qualify for the R&D tax credit if the firm can prove a technological uncertainty related to the capability, methodology, or appropriate design of the solution, Guay adds. The architecture firm should document its research activities, with particular attention to the way it iterates and contemplates different alternatives to solve the problems encountered.

Look Ahead to 2021
Firms can start planning now to streamline the tax filing process for 2021 and to take full advantage of the CARES Act provisions. To maximize cash flow, offices should focus on receivables, timely billing, and understanding the billing, delinquency, and lien notification terms of each contract, according to Terri Richards, entrepreneurial services principal at Kaufman Rossin. Additionally, in 2020 and perhaps into 2021, some firms may have modified or negotiated down their office leases to help with cash flow; and in many cases, such leases become capital leases and are treated like loans for tax purposes. “That means any relief you received—such as monthly payment reductions, temporary payment suspensions, or payment delays—may count as taxable income,” says Robert Matt, tax senior manager at Kaufman Rossin.

Changes to tax regulations due to the pandemic and economic slowdown have added numerous complexities to tax filings this year. If navigated carefully, the fine print may help firms cushion losses from 2020.

This story has been updated since first publication.