Architecture Firms: Don’t Ignore R&D Tax Credit Amid Pandemic Challenges

The R&D tax credit could facilitate innovative solutions for architecture firms as they get more creative to design future-proof buildings for the post-COVID-19 era.

In the last decade, architects had to adapt to new sustainability and energy-efficiency trends and requirements. Now, the COVID-19 pandemic has changed how individuals view and interact with the buildings they inhabit and the spaces where they work. As they reimagine and future-proof their projects, architects could turn to the highly valuable Research and Development (R&D) tax credit to help mitigate financial risks, invest in innovation, and respond to business challenges.

The federal R&D tax credit (officially named the Credit for Increasing Research Activities) was introduced in the U.S. tax code in the 1980s as a powerful incentive for companies to innovate and raise their competitive advantage. The credit can be used to offset, dollar-for-dollar, a company’s income tax liability. It is calculated annually and captured on the company’s tax return. Recent data suggests that, collectively, U.S. companies claim approximately $10 billion in credit each year.

Identifying and calculating qualifying expenses

While the R&D tax credit is very popular in the manufacturing and technology industries, it is often overlooked by architectural firms. The oversight may originate from a misconception that the R&D credit is limited to activities performed by scientists or engineers in laboratories. In addition, the interpretation of what constitutes a qualified research activity used to be narrower. However, over the last decade, the R&D tax credit has significantly evolved thanks to new judicial and legislative guidance that has been generally favorable to architectural and engineering firms, among others. An experienced R&D tax specialist can help an organization determine what is an eligible expense and make accurate calculations.

For architectural firms, the bulk of the R&D tax credit comes from salaries paid to their employees, which generally represents 7 percent to 9 percent of eligible expenses. For example, the tax credit for an architectural firm with $1 million in qualifying expenses could amount to $70,000 to $90,000. The dollar amount that can be claimed as R&D tax credit annually depends on how much was spent by the firm in qualifying R&D projects, including the cost of certain supplies and fees paid to contractors for R&D services.

Capturing the R&D tax credit with innovative projects

The design of architectural solutions for complex buildings and infrastructures often require architects to contemplate and experiment with different design alternatives. Therefore, many projects regularly pursued by architectural firms involve qualified research activities. The combination of new technologies, sophisticated aesthetics, value-engineering principles, building code requirements, geotechnical constraints, and advanced functionalities, require architects to regularly engage in qualified research activities.

The demand for building design that is not only beautiful and functional, but also sustainable and energy-efficient, has introduced technological challenges that architects must overcome in their projects. An innovative technology research project could 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. In addition, the architecture firm should document its research activities, paying close attention to the way it iterates and contemplates different alternatives to solve the problems encountered.

The ‘new normal’ in architecture

The COVID-19 pandemic will likely have long-lasting effects on the architecture industry and lead to significant changes in building design. Its effects on building architecture may also trigger a wave of technical challenges that could lead to more qualified research activities in architectural firms.

The current health crisis is seen by some in the industry as a turning point in architecture. Many business owners have realized how much they can accomplish with less office space, while residential projects may now require spacious work areas or even space for exercise. These spatial challenges could potentially be mitigated by innovative architectural solutions.

Several architecture firms are already undertaking creative initiatives to respond to challenges brought on by the pandemic. These projects could include activities and costs that can help firms capture the R&D tax credit:

• Redefining how typical spaces are designed and configured to reduce spread of disease
• Repurposing existing buildings to accommodate new types of operations
• Designing “pandemic-proof” solutions in multi-family and commercial buildings
• Designing new architectural concepts with advanced automated touch-less technologies
• Designing solutions compatible with new modular construction techniques
• Retrofitting existing spaces to enable proper distancing between individuals
• Developing new architectural concepts better suited for individual needs in lockdowns, remote working, etc.
• Designing buildings with enhanced HVAC systems and outdoor connectivity
• Developing new safe urban solutions to revitalize downtown areas

Industry professionals believe the amount of credit captured by architectural firms will likely increase in the wake of the COVID-19 crisis. To avoid potential pitfalls, architectural firms should properly substantiate their credit calculation and the eligibility of their projects. If the architecture firm employs a third party, it should carefully review that the terms of the contractual agreements with the third party enables the architecture firm to capture the R&D tax credit.

The R&D tax credit is a substantial value driver, but it comes with a complex set of regulations that can render the claim preparation process burdensome. Working with experienced R&D tax specialists can go a long way into maximizing credit benefits while also minimizing compliance risk. Companies should rely on the expertise of R&D tax specialists to help identify the projects that will satisfy the tax code requirements, properly document eligible research activities, verify calculations of qualifying expenses, and accurately track tax credits.