Before May 2023, R&D tax credits were largely out of reach for architecture firms. The IRS had strict criteria that excluded many activities common to architects, such as designing, testing, and improving building systems. However, a landmark ruling in May 2023 and subsequent changes in tax regulations have opened the door for architectural firms to claim these credits. This shift represents a significant opportunity for firms to reduce their tax liabilities and push innovation.

R&D tax credits are made to reward businesses for engaging in research and development activities. For architectural firms, this could mean receiving a tax credit for improving energy efficiency, testing alternative materials, or exploring innovative structural solutions. These credits can significantly offset the costs associated with such projects, with eligible firms potentially claiming 6.5% to 10% of their qualified research expenditures (QREs). For smaller firms or start-ups, this can also include payroll tax credits—a crucial benefit for those not yet profitable.

Now is the time for architecture firms to explore their eligibility and take advantage of this financial incentive. In the following sections, we’ll outline:

• Eligibility requirements for architecture firms to claim R&D tax credits
• How the Four-Part Test Applies to Architecture Firms
• Step-by-Step Guide to Claiming R&D Tax Credits for Architect Firms

Eligibility Requirements for Architecture Firms to Claim R&D Tax Credits

To qualify for R&D tax credits, architectural firms must meet specific criteria established by the IRS. The eligibility requirements ensure that only activities involving genuine research and innovation receive tax deductions. Here’s what your firm needs to know:

• Gross receipts limits for payroll tax credits: firms must have gross receipts of $5 million or less for the year to claim the payroll tax credit benefit. This rule applies primarily to small businesses and start-ups.
• Location of activities: all qualifying research activities must be conducted within the United States. This includes testing, designing, and developing building components or systems.
• Types of qualifying activities: projects must meet the four-part test established by the IRS. These criteria help identify whether the activities are eligible for the tax credit. In the next section, we’ll explain each part of the test in detail.
• Documentation requirements: firms must maintain detailed records of qualifying activities, including design drafts, CAD files, payroll data, and material expenses. Clear documentation is essential to support claims during IRS reviews.

Meeting these eligibility requirements allows your firm to claim credits for specific activities, like developing energy-efficient designs or experimenting with innovative materials. By aligning your projects with IRS criteria and documenting them thoroughly, you not only reduce tax liabilities but also gain valuable insights into your firm’s capacity for innovation. 

How the Four-Part Test Applies to Architecture Firms

The IRS uses a four-part test to determine whether activities qualify for R&D tax credits. For architecture firms, understanding these criteria is essential to identifying eligible projects and ensuring compliance. Let’s explore how each part of the test applies specifically to architectural activities:

• Permitted purpose: to qualify, the activity must aim to create or improve a business component’s functionality, performance, reliability, or quality. For architects, this often involves designing more energy-efficient buildings, improving structural integrity, or developing innovative design systems.
• Elimination of uncertainty: the project must address uncertainty regarding the capability, method, or design of a business component. Architects might face uncertainty in selecting materials that achieve specific performance goals or designing structures that meet unique environmental challenges.
• Process of experimentation: the activity must involve systematic experimentation to resolve uncertainty. This could include testing alternative structural designs using CAD simulations, exploring various material options, or conducting airflow analyses to optimize ventilation systems.
• Technological in nature: the project must rely on principles of engineering, physical science, or computer science. Architectural firms meet this criterion when they use advanced tools like building information modeling (BIM), structural analysis software, or sustainable material science in their work.

By aligning your projects with these criteria, you can confidently identify qualifying activities. Thorough documentation of how your projects meet each element of the test will strengthen your claims and make the process smoother. In the next section, we’ll provide a step-by-step guide to claiming these credits effectively.

Step-by-Step Guide to Claiming R&D Tax Credits for Architect Firms

Your first step is to review your architectural firm’s projects to determine which activities meet the IRS’s criteria for R&D. These activities shouldmust comply with the four-part test we have covered previously. 

Examples of qualifying activities for architects include:

• Developing energy-efficient designs.
• Testing alternative materials for durability or sustainability.
• Using CAD or BIM software for design modeling and analysis.
• Exploring new structural solutions to meet unique project needs.

Create a checklist to ensure all projects are reviewed systematically. Collaborate with project managers and technical teams to identify activities that align with the IRS’s four-part test. 

1. Document Your Work Thoroughly

The IRS requires detailed records to substantiate your R&D tax credit claims. Lack of proper documentation is one of the most common reasons claims are rejected.

Here’s what to document:

• Design and project files. Include drafts, sketches, CAD models, and BIM data showing experimentation and design processes.
• Employee activity logs. Maintain records of hours spent on R&D-related tasks, breaking them down by project and activity.
• Material costs. Keep receipts and invoices for materials used in testing or design experiments.
• Testing data. Include the results of simulations, prototypes, and other experimental tests conducted during the project.

Organize this documentation systematically. Use folders labeled by project name and ensure digital backups are available. This organization will help streamline the claiming process and make it easier to respond to potential IRS inquiries.

2. Calculate Qualified Research Expenditures (QREs)

Next, calculate the costs associated with your R&D activities. The IRS allows specific categories of expenditures to be included in your claim:

• Wages. Salaries paid to employees who worked on R&D activities. If an employee worked part-time on R&D, include only the proportionate wage.
• Supplies. Costs for materials used during experimentation or prototyping.
• Contract research. Up to 65% of the costs paid to contractors for qualifying research.

Use payroll data, invoices, and other financial records to create an itemized list of QREs. Double-check all calculations to avoid discrepancies, and ensure you’ve excluded non-qualifying expenses like marketing costs.

3. Consult with a Tax Professional

The R&D tax credit process can be complex, especially for architectural firms new to this area. Consulting with a tax professional who specializes in R&D tax credits can help:

• Identify all qualifying activities and expenses you might overlook.
• Maximize your claim while ensuring compliance with IRS requirements.
• Navigate the intricacies of the filing process, including choosing the most beneficial filing method.

Look for a professional or firm with experience in architectural claims and check for client references or success stories to ensure their expertise.

4. Choose the Appropriate Filing Method

The IRS offers two methods for calculating R&D tax credits:

1. Traditional method. Provides a 20% credit on qualifying expenses over a set base amount. This method requires detailed historical data on R&D expenses.
2. Alternative Simplified Credit (ASC) method. Provides a 14% credit on qualifying expenses above 50% of the average R&D spending for the past three years. If there’s no prior R&D spending, the credit is 6% of current expenses.

Work with your tax professional to determine which method offers the highest benefit based on your firm’s financial history. For newer firms without substantial R&D history, the ASC method is often more practical.

5. Prepare and Submit Your Claim

Finally, file your claim with the IRS by completing the necessary forms:

• Form 6765 (Credit for Increasing Research Activities). This is the primary form used to claim the R&D tax credit. Include detailed information on your QREs, qualifying projects, and the calculation method chosen.
• Attach all supporting documentation. Include records of projects, employee activity logs, and financial data to substantiate your claim.

Submit the completed forms with your corporate tax return. If you’re claiming payroll tax credits as a start-up, file Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities).

Double-check everything before submission to ensure accuracy and completeness. Errors can lead to delays or rejections.

Help in Claiming R&D for Architect Firms

Navigating R&D tax credits can be complex, but you don’t have to do it alone. FI Group offers specialized expertise in helping architectural firms identify and maximize their R&D tax credit opportunities. Our team of professionals understands the intricate IRS requirements and can provide tailored guidance to ensure your firm captures every eligible innovation while maintaining full compliance. If you’re looking to transform your research and design activities into potential tax savings, we’re here to help you through each step of the process.