The R&D Credit for AEC Firms: Still a Powerful Tax Strategy
With the drawn-out and politically supercharged election season in the rear-view mirror, many Americans, and especially tax accountants, are awaiting the unveiling of tax legislation. Will change come in waves or will everything be rolled into one massive bill? Also creating uncertainty is the looming expiration of the 2017 Tax Cuts and Jobs Act. Many of the beneficial tax law changes were not permanent, and some permanent ones weren’t taxpayer-friendly. However, amidst all of this uncertainty, there are still some lucrative opportunities for the architecture, engineering, and construction industries, including the Credit for Increasing Research Expenditures (R&D Tax Credit).
Firms must constantly adapt to remain competitive. The R&D Tax Credit empowers AEC firms to fuel innovation, drive competitive advantage, and support the development of cutting-edge solutions within the industry. Following a period of significant political and economic uncertainty, the AEC industry now faces the potential for significant shifts in tax legislation. This period of transition brings new challenges and opportunities.
The 2017 Tax Cuts and Jobs Act initially provided significant tax benefits for firms, including changes to the treatment of Research and Experimental (R&E) expenses. However, subsequent legislation modified these provisions. Specifically, for tax years beginning after 2021, the requirement to capitalize and amortize R&E expenses over 5 years under Section 174 was introduced. While the Credit for Increasing Research Expenditures (R&D Tax Credit) remains available, the deductibility of the expenses used in the calculation of the credit was significantly curtailed. Prior to these changes, R&E expenses were fully deductible.
Even with these changes, the R&D Tax Credit absolutely remains a vital component of a firm’s tax strategy for many reasons, including:
Maximizing Permanent Tax Savings
The R&D Tax Credit is a permanent feature of the tax code, offering your firm consistent opportunities to reduce tax liabilities year after year. By investing the time to set up efficient systems for tracking qualified expenses, the credit can become an integral, recurring element of your tax strategy.
Unlocking Benefits for Everyday Activities
Many AEC firms mistakenly believe their work doesn’t qualify for the credit. However, the credit applies to routine activities like refining project designs, developing custom solutions, and improving processes to meet client specifications. These efforts often align with the definition of Qualified Research Activities (QRAs), even if they’re not groundbreaking or revolutionary.
Addressing Section 174 Challenges Proactively
While the current requirement to amortize R&D expenses under Section 174 may be a deterrent, the proposed legislation aims to restore immediate expensing. By continuing to claim the credit, your firm will be better positioned to benefit from these changes once enacted. Even under the current rules, the credit provides a dollar-for-dollar reduction in tax liability, mitigating the cash flow impact of amortization.
Enhancing Competitive Positioning
By leveraging the R&D Tax Credit, your firm can reinvest savings into innovation, technology, and talent acquisition. These investments improve service offerings and position your firm as a leader in the competitive AEC market.
Optimizing Payroll Tax Offsets
For firms with startup subsidiaries or divisions, the credit can offset up to $250,000 of payroll taxes annually. This feature is especially valuable for firms pursuing new ventures or expanding their service lines.
Capturing State-Level Incentives
Approximately 40 states offer R&D Tax Credits, many of which are refundable or provide additional benefits. Ignoring the federal credit may mean leaving state-level incentives on the table as well.
Mitigating Risk Through Documentation
Concerns about IRS scrutiny or compliance can be alleviated with proper documentation. Partnering with specialists who understand the engineering industry ensures that your claims are robust and defensible, reducing audit risks.
Next Steps
You’re tasked with balancing many things, including financial growth. The R&D Tax Credit is not just a tax savings tool—it’s a strategic lever for reinvestment and innovation. By considering and utilizing this credit, you position your firm to fuel innovation and stay competitive.
Join Marla Miller, Managing Director of Tax, and me on Thursday, February 6th, for a State of the Union on Research and Development Tax Credits – we will cover qualifying activities, calculation mechanics, legislative updates, and more. Register Today!
