The phrase “research and development” (R&D) may bring to mind white lab coats and Silicon Valley brainstorms, but new provisions in the federal tax code could turn workaday architecture firms into R&D hubs. The Research and Experimentation Tax Credit, also known as the R&D Tax Credit, offers up to $10 billion in credits to businesses each tax year. In December, Congress extended and made the 35-year-old credit permanent while changing its scope to allow more small and midsize businesses to participate. It also shifted the credit’s focus from considering only revolutionary developments within an industry to rewarding evolutionary activities such as investing time and resources in the development of new ideas that, while valuable, are not necessarily groundbreaking.
“It’s less about new to the world,” says Dean Zerbe, a Washington, D.C.–based national managing director for tax-services provider Alliantgroup. “It’s got to be new to you, new to your work.”
Determining What Qualifies
A claim must meet four criteria to be eligible for the credit: the research is technological in nature and integrates one of the hard sciences, such as using computational design tools; it creates a new or improved level of functionality, reliability, or durability, like designing for better energy efficiency; it eliminates some uncertainty that was present at the start of the process, such as devising alternative design approaches for high wind loads; and it involves experimentation, which could be as simple as trying out different designs to lower material costs for a project.
Modest research or new takes on familiar questions—such as increasing natural light in a hospital to improve patient healing—also count. “You don’t have to be swinging for the fences,” Zerbe says. “A single is great, too.”
The credit does not apply to research that was completed after a product or design was commercially produced, the adaptation or duplication of an existing business component, or surveys and studies conducted to improve a firm’s internal operations.
Calculating Its Value
The latest changes to the credit allow startups that are less than five years old and have annual gross receipts of less than $5 million to take up to $250,000 in credits against their payroll taxes for up to five years. Companies making less than $50 million in gross receipts for the three years preceding the tax year can claim the credit against their Alternative Minimum Tax, which was previously the major barrier preventing smaller businesses from accessing the credit. Think of it as a dollar-for-dollar credit that can be collected on up to 6.5 percent of employee wages for time spent by designers, supervisors, and support staff on qualified activities, Zerbe says. Additionally, 65 percent of the amount paid to contractors, such as energy consultants, can be claimed as a qualified expense and used toward the credit.
Claiming the credit is relatively simple, Zerbe says: Firms just need to show that they did the qualifying work. Given a typical architecture firm’s time-tracking and project-documentation practices, the expenses should be easy to back up. This kind of flexibility in reporting requirements can be a boon to firms that bid on a number of projects or do work that may never be implemented.
Wayne, N.J.–based Tricarico Architecture and Design often bids on brand-identity and visual-merchandising projects. Its president Nicholas Tricarico, AIA, says that the roughly 115-person firm was able to use the credit for as-yet-unpaid work bidding on a project for a men’s clothing retailer. “We probably spent a good 300 hours creating a look, plus some outside consulting work, and yet we don’t even know today who they have awarded the work to, if they even did,” he says. The R&D credit, however, enables the firm to take such risks.
The resulting savings have been substantial, Tricarico adds, and he expects that his firm will earn back even more from the credit this year and next.
This post has been updated.