Architecture Firms Can Get Research and Development Tax Credits
Sometimes “too good to be true” really is true
by Justin DiLauro, BSE, JD
How do you … qualify for a tax credit during design?
Summary: When architects hear that their design activities may qualify for federal and/or state research and development tax credits, their first reaction is often to presume that it sounds too good to be true. They have trouble believing it because they simply consider much of their design and development activities to be "routine," far from rising to the level of anything that would revolutionize the industry. This is a costly misconception.
Applicable tax laws and regulations, in fact, do not require a business to discover something so innovative that it advances the field as a whole. They simply require that a product or process be new or an improvement for the individual taxpayer. Because many architecture project requirements are unique, design activities often qualify for generous federal and state research and development tax credits.
As defined in the tax code, research and development activities must meet four main requirements to be eligible for tax credits:
- Business component development or improvement
- Elimination of uncertainty
- Process of experimentation
- Technological in nature.
Since research and development tax credits were intended to promote domestic innovation, they are not specific to any one industry and are indeed applicable to the field of architectural services. These credits are activities-based. Thus, an architectural design project qualifies if it meets all four of the above requirements. Let’s take a quick look at each.
Business component development or improvement
Applied to an architecture design firm, business components include the architectural designs that a firm develops for its clients. Since many architectural design projects are unique with respect to specific client requirements, municipal codes for building structures and energy usage, site conditions for geotechnical and climatic characteristics, and a seemingly infinite number of other factors, a firm may need to develop new or improved building designs for each project it undertakes.
Additionally, although the business component’s development cannot relate to purely aesthetic features, activities related to the development of the functional, performance, reliability, or quality features of a building or structure can qualify. For example, architectural design activities related to the design of a building footprint, orientation, and geometry to meet energy efficiency and usage requirements—whether to meet certification standards or municipal codes—can be eligible for tax rebates. As such, many architectural design projects meet the business component requirement to the extent of their functional design development.
Elimination of uncertainty
Architects are frequently confronted by design uncertainties pertaining to a building’s envelope, optimal materials, and detailed structural, mechanical, and electrical systems. Therefore, even if an architect is not uncertain as to the capability or method of developing a functional building design, the project will meet the uncertainty requirement if the architect is uncertain as to the optimal or final design.
Process of experimentation
During the course of an architectural design project, the architects’ and engineers’ collaboration in developing and assessing a design through modeling or computational analysis can satisfy the experimentation requirement of qualified research. So long as the design evaluations occur before the business component is deemed to meet the functional and economic requirements of the project, the activity will be considered within the process of experimentation.
Technological In nature
An architectural design process will satisfy this requirement to the extent that it relies on engineering, including the reliance on mechanical, electrical, and industrial engineering in the design of a structure’s features to meet functional or performance requirements. Even if an architecture design firm’s activities employ existing and known technologies, it will not necessarily preclude them from considering this activity for tax credits, since applicable rules permit a taxpayer to employ existing technologies and known principles as part of the “technological in nature” requirement.
A note about contracts
Although architecture service firms may conduct qualifying research activities under contract with their clients, the contract or payment for these services will not necessarily exclude the activity as qualifying research. For work under contract, payment is not the determining factor. If the firm bears the economic risk and retains rights to the research, the services will not be excluded as qualified research. As an example, activities performed under lump-sum projects with no restriction as to how the architect can use knowledge gained during the project may still qualify for tax credits.
Available research and development tax credits are especially important in today’s economy. As such, an architecture design firm needs to fully understand its eligibility for the incentives—and that sometimes too good to be true really is true. |
