Leveraging the R&D Tax Credit for Architectural and Engineering Firms

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Key Takeaways

  • Architecture and engineering firms that develop new or improved designs can benefit from the research and development (R&D) tax credit.
  • To assess if the activities in a project are eligible for the R&D tax credit, use these criteria: Allowed Goal, Removal of Design Uncertainty, Experimentation Process, and Hard Science-Based.
  • Eide Bailly offers specialized guidance to help architecture and engineering firms navigate and maximize benefits from the R&D tax credit and Section 174 changes.

Architecture and engineering firms participating in qualified activities as defined under section 174 of the Internal Revenue Code (IRC) may be able to claim research and development (R&D) tax credits at both the state and federal level under IRC Section 41 (Credit for Increasing Research Activities). This credit rewards firms investing in innovation by incentivizing specific types of research and development-related activities.

These activities include:

  • Development of new or improved preliminary design, schematic design, construction documents, and/or Computer-Aided Design (CAD).
  • Enhancement of software applications to increase functionality or performance.
  • Creation of prototypes or models, such as automation engineering.

The R&D tax credit is a powerful tool for fueling innovation: in one recent multi-year study, Eide Bailly assisted a client in realizing $651,000 in R&D tax credits. However, it has also been a source of complexity and confusion. By understanding how this tax credit works and how to qualify, A&E firms can potentially save thousands of dollars on their tax liability.

Eide Bailly’s tax advisors simplify the complex, helping firms identify qualifying activities and unlock the benefits of the R&D tax credit.

The Four-Part Test for Qualified Activities

The definition of “research and development” is broad, making it challenging for most businesses to determine which activities qualify when claiming the R&D tax credit. In architecture and engineering, allowable activities typically occur during the schematic design and design development stages.

To qualify for the R&D credit, a project must satisfy the four-part test, as outlined in Section 41(d) of the IRC:

  1. Permitted Purpose: Develops a new or improves an existing product, process, or software. Examples include:
    • Designing medical facilities, office buildings, or government facilities
    • Creating mechanical and electrical systems
    • Developing an addition to an existing structure
  2. Elimination of Design Uncertainty: Intended to discover information that eliminates uncertainty in capability, method, or design. Examples include:
    • The optimal design of a healthcare facility to satisfy specifications regarding airflow rate and humidity rating
    • The optimal design of a high school given unique geological site constraints
  3. Process of Experimentation: Includes a process of experimentation to evaluate potential solutions to technical challenges. Examples include:
    • Utilizing a development cycle that includes stages such as preplanning, schematic design, design development, planning, and construction documentation
    • Proceeding through multiple iterations of CAD designs
    • Utilizing Building Information Modeling (BIM) systems to change unique design components
  4. Hard Science-Based: Utilizes information that fundamentally relies upon principles of hard sciences such as engineering, physical science, or computer science. Examples include:
    • Projects that rely upon principles of mechanical engineering
    • Projects that rely upon principles of structural engineering

Exclusions from the R&D Tax Credit

It is equally important to note the activities that are not covered or are explicitly excluded from the R&D tax credit. These exclusions include:

  • Activities that involve adaptation and duplication, such as creating multiple identical elementary schools for a school district
  • New or added components that serve a purely aesthetic purpose.

How Eide Bailly’s R&D Tax Credit Team Can Help

Turn your innovation into tax savings with the help of a trusted advisor. With expertise in federal and state R&D tax credit rules, criteria, code, and regulations, Eide Bailly’s Research & Development Tax Credit Team help you navigate and benefit from Section 174 and R&D — empowering you to invest more in innovation and stay ahead in your field.

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