The Rules is a monthly series covering important regulations in a clear manner for architecture, engineering, and construction professionals.
Introduced in 1981 as an economic recovery measure and amended continually thereafter, the federal Research & Development tax credit aims to increase domestic technological advancements by allowing companies to claim research-related employee wages and other allowable expenses as adjustments. The economic conditions brought about by the COVID-19 pandemic has resulted in “many companies experiencing liquidity issues,” says Greenville, S.C.–based Adam Quattlebaum, a partner at accounting firm Dixon Hughes Goodman. “The R&D credit is a great mechanism to address this through reducing estimated tax payments, reducing tax liability, and by requesting refunds for previous ‘open tax years’ paid.” This window typically stretches back three years.
The credit can offset future tax liability as well. “Oftentimes, research credits exceed a firm’s tax liability,” Quattlebaum says. “In this situation, excess credits can be carried forward for 20 years to offset future tax liability.”
He estimates that the credit “typically ranges from 5% to 10% of eligible research expenditures; that is, if a firm has $1 million of eligible research costs, the tax credit and associated cash savings could be $50,000 to $100,000.”
To qualify, the work needs to involve the design of new products or processes, the enhancement of existing products or processes, or improvement upon existing prototypes or software. Many firms leverage time-and-expense software to track eligible wages and costs in detail, but they can estimate qualified costs as well.
Brian Aumueller, managing director of the consulting firm Alliantgroup’s New York office, has written about ways that architects specifically can qualify for the R&D credit. Eligible tasks can include employee time and relevant expenses relating to sustainable innovations; for example, work that could help a project achieve LEED certification, schematic design for any project type, and conducting environmental performance and impact analyses.
Since 2014, Seattle-based LMN Architects has claimed the tax credit to offset wage costs in research and development conducted largely by its internal LMN Tech Studio. The six-designer group splits its time between project-based research and product development of tools and processes for general use. LMN recently claimed the credit for some employee time spent on the design for the Seattle Aquarium’s Ocean Pavilion. “The tax credit supported our design work incorporating parametric analyses for daylighting in this aquarium context,” says partner Sam Miller, FAIA. The project prioritized access to daylighting and views, but also had “to minimize the amount of direct sun on the exhibits.”
Firms might not realize their design work can qualify for the tax credit, Miller says. “In our design process, we use iterative design methods and simulation and that can all qualify.”
One litmus test to conduct: “If the architect does not have financial risk for their work, then the costs associated with that project would not be eligible,” Quattlebaum says, Typically, a firm’s fixed-price or lump-sum contracts carry financial risk, he adds, but the terms of each contract must be analyzed to evaluate eligibility.
A bill proposed in Congress, the Furthering Our Recovery With American Research and Development (FORWARD) Act, would make R&D tax credits refundable. Because “many [architecture] firms generate credits that exceed their tax liability,” Quattlebaum says, “the proposed changes would result in additional cash savings for firms who invest in R&D.”
The uncertain economic outlook may give pause to designers considering the pursuit of new methods, tools, and strategies, but the R&D tax credit, as is, can offer a cushion and an incentive.
