How to Claim R&D Tax Credits for Architects in 2024

Recent changes to the R&D Tax Credit have made it much more easily obtainable to architects. These R&D tax credits for architects can provide substantial savings in tax credits annually. 

But how does it all work? And what’s the best plan of action to get started?

We’ll be covering all of that along with some examples and insider tips to help you save money on your Research and Development initiatives.

Let’s get into it!

What is the R&D Tax Credit?

The research and development tax credit encourages businesses to innovate and think ahead. It credits an average of 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses.

The R&D tax credit applies mainly to small and medium-sized businesses. It provides tax incentives for:

• Developing new products or services
• Improvements in old products or services
• The creation or testing of new prototypes 

Until May 2023, the IRS tried to keep the R&D tax credit off-limits to architects, engineers, and other technical persons. 

The IRS had argued that their work, including designs and models, didn't qualify as ‘real’ R&D as designs and calculations were made strictly for applied projects.

In more technical terms, the IRS argued that these professions' designs, blueprints, and models are not “eligible business components.”

The IRS upheld this until the 2023 decision, even though many architectural and engineering companies had previously claimed the R&D tax credit successfully, with judges taking their side.

How Does the Research & Development Tax Credit Work?

The R&D tax credit provides tax breaks to companies that conduct research and develop new products, improvements, and other innovations.

For architectural firms, the breakthrough case for the tax credit came in May 2023. The U.S Tax Court ruled in favor of architects, engineers, and other technical professions, resulting in their so-called “day-to-day activities” sometimes qualifying for the R&D tax credit. 

This case set the precedent that research and development can be performed as the result of day-to-day projects in these firms as long as they meet certain criteria, which can be summed up in 3 parts:

1. There must be some uncertainty in the design at the start of the project.
2. Experimental techniques must have been used in the research, such as alternative designs being tested, whether modeled or simulated.
3. The project must be technical in nature.

If the firm has been in business for less than 5 years and has less than 5 million in gross receipts, the R&D tax credit can be applied to payroll taxes. This allows firms that have yet to profit to benefit.  

Can Architects Claim The R&D Tax Credit?

In short, yes. With the Harper decision, architects now have a better claim than before to R&D benefits. 

To do so, they must demonstrate that their design work involves overcoming uncertainty through experimental activities according to a four-part test (see below). 

This has made the path to the tax credit substantially more accessible for these professions, although some gray areas remain.

How to Claim R&D Tax Credits for Architects

There are a few steps to claim R&D tax credits for architects that will ensure their maximum potential benefits.

This process can be divided into 3 critical subsections: checking your eligibility, understanding the four-part test, and consulting a tax planning team.

1. Check Your Eligibility

An architectural firm must determine whether its activities qualify for the R&D tax grant. 

All firms can benefit, but the credit is aimed at small to medium firms with qualifying research activities, as long as these activities are conducted within the U.S.

It's most impactful for startups with less than 5 million in gross receipts operating for less than 5 years, who are able to apply the claim to their payroll taxes. Even so, all businesses engaged in R&D activities can use the R&D tax credit to offset some of their costs.

Qualifying activities cover a large range, including any efforts to develop or improve new products, processes, or software. 

Examples include:

• Improving design energy efficiency
• Using innovative materials
• Improving structural integrity 

2. The Four-Part Test

To qualify for the R&D Tax Credit, your projects must be engaged in activities that pass the four-part test that was created by the precedent set by the 2023 IRS case:

1. Permitted Purpose – The project aims to create or improve the functionality, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty – The project begins with uncertainty about how to achieve the project goal and involves work to eliminate this uncertainty.
3. Process of Experimentation – The project involves a systematic process of experimentation by evaluating one or more alternatives.
4. Technological in Nature – The experimentation relies on the hard sciences, such as engineering or computer science.

Although still somewhat subjective, using previous examples to show that one’s efforts fall within the four parts is the most straightforward way to claim your case.

3. Speak to a Tax Planning Team

Finally, to maximize the benefits of R&D tax credits for architects and similar professions, it's a good idea to seek the expert advice of a dedicated tax attorney.

A tax planning team can help you identify everything that might be considered a qualifying R&D activity and ensure that each claim you make meets the standards of the four-part test.

In addition, they can help you through the tedious documentation and claiming process, saving you time and effort in the long run. 

Examples of R&D for Architects

Common examples of research and development for architects include:

• Developing Energy-Efficient Designs – This can include using unique energy-efficiency materials or attempts to achieve LEED certification.
• Alternative Design Concepts – Any research into or testing of different design options. For example,  to meet complex requirements or to improve functionality.
• Advanced Modeling and Testing – Using CAD models and other simulations to compare different design options.
• Innovative Use of Materials – Exploring new materials or new uses of old materials to find improvements in energy efficiency, durability, or other benefits. 
• Environmental and Structural Analysis – This includes water flow optimization, improvements in electrical systems, and ventilation solutions.

These examples are just some of the qualifying R&D activities that architects may be able to claim for the tax benefit. 

The main thrust is innovation and improvement in design through experimentation. 

How The IRS Calculates the R&D Credit

The IRS uses two primary methods for calculating the R&D tax credit: the traditional and the Alternative Simplified Credit (ASC) method.

1. Traditional method – Document and calculate 20% of research expenses over a base amount. The base amount is a fixed-base percentage multiplied by the average annual gross receipts for the last 4 years.
2. Alternative Simplified Credit (ASC) method – This method calculates the credit based on 14% of the qualified research expenses (QREs) that exceed 50% of the average QREs for the 3 preceding tax years. If the company had no research expenses in any of the previous three years, the credit is 6% of the QREs for the current year​​.

The approach you should choose depends on the calculation method that best suits a company’s financial situation and R&D spending patterns.

How Much Can Architects Earn from the R&D Tax Credit?

Taking an average of the above methods, you can expect to credit about 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses

Although there are multiple ways to calculate your credit, the range of potential deductions from the R&D tax credit always depends on your annual qualified research expenses. 

Due to the Protecting Americans from Tax Hikes (PATH) Act of 2015, this payroll tax credit offers an immediate cash benefit even to start-ups and companies that are not yet profitable. 

This means new and small architecture firms have the most to gain from the R&D tax credit by significantly reducing their tax liabilities.

Frequently Asked Questions

How Far Back Can You Claim R&D Tax Credits?

You can claim R&D Tax Credits for the last 3 tax years. If your architectural firm has missed out, you still have a chance to amend past returns and get the credit. This could lead to significant savings on already completed research and development initiatives.

Is the R&D Tax Credit Worth It for Architects?

Absolutely. The R&D Tax Credit offers large potential refunds to small and medium-sized architecture firms. It rewards their innovation and forward-thinking with a direct tax reduction. 

How Should Architects Document R&D Expenses?

Document everything from employee wages on R&D projects to materials and third-party services. Each of these can be counted as expenses that can impact the final tax credit amount.

Ensure your records link expenses to specific projects that meet the eligibility criteria as outlined by the four-part test. This careful tracking simplifies the ability to defend your claim to the credit and supports your firm in case of an IRS review​​​​ or audit.

What Doesn’t Qualify for the Credit as an Architectural Firm?

Not everything qualifies for the R&D Tax Credit. Important exceptions to the R&D tax credit for architects include: 

• Post-commercial production research
• Adapting designs for a specific client
• Duplicating existing products 
• Funded research 
• Routine data collection
• Market research

Each of these violates at least one part of the four-part criteria.

Start Your R&D Claim - Do You Qualify?

At RevenueSafe, we explore a business’s R&D methods and expenses to ensure a compliant claim of maximum value. Our process is simple, straightforward, and easy to use. So don’t wait, take the opportunity now to save money for your business.