Designing Your Optimal Tax Strategy: An Overview of Incentives Available to Architects

As architecture firms struggle to regroup in a post-recession economy, they may discover a financial boon through a little strategic tax planning.  Capitalizing on tax provisions such as §179D and the R&D Tax Credit, and properly applying cost segregation and tangible property regulations to minimize tax burden, may result in substantial savings.

Added to the Internal Revenue Code in 2005 as part of the Energy Policy Act, §179D may enable architects to achieve significant tax savings while promoting environmentally-friendly improvements in their communities.  Section 179D typically provides a tax deduction for building owners that have implemented energy efficient upgrades, but when the owner is a local, state, or federal government, the deduction may be allocated to the architecture firm that designed such improvements.   The deduction is worth up to $1.80 per square foot.  Specifically, a taxpayer may receive up to $.60 per square foot for lighting systems, $.60 for HVAC, and $.60 for the building envelope when those systems are at least 50 percent more efficient than the standard specified in ASHRAE 90.1-2001.  Architects must collaborate with third parties to certify that the projects satisfy the standard.  Cumulatively, §179D may represent tremendous savings for an architecture firm.  Capital Review Group, a Phoenix-based tax consulting firm that works with architects to certify projects, shared the experience of one client, a large architectural group, that garnered nearly seven million dollars in deductions over a five-year period under §179D.  The deduction applies to new construction as well as to retrofits to existing buildings.  Architects may look back through their project portfolios for the past three years and if they discover that they missed an opportunity to claim the §179D deduction during that time period, they may file an amended return. (Source: http://www.aia.org/practicing/Aiab083035).

The Research and Development Tax Credit represents hundreds of thousands of dollars in savings for businesses each year, but architecture firms often miss out on the opportunity to claim the credit based on an erroneous belief that they do not qualify.  In fact, some of the activities that architects routinely perform may enable them to reap the benefits of this lucrative credit.  To qualify for the R&D Credit, an activity must satisfy four requirements:

• The purpose must be to create new or improve existing functionality of a business component.  For architects, this may include designs completed for clients, as long as the design does not relate solely to aesthetical improvements.
• The taxpayer must intend to eliminate uncertainty about the project.  Architects typically encounter several uncertainties at the outset of a project pertaining to its optimal final design.  If the architect proceeds to conduct experimentation and testing designed to resolve such uncertainties, he or she will satisfy this requirement.
• The taxpayer must engage in a systematic process of experimentation, such as modeling or testing.
• The process of experimentation must be technological in nature and must fundamentally rely on the physical or biological sciences, engineering, or computer science.  Architects often utilize experimental processes that rely on engineering or computer science.

(Source: http://info.aia.org/aiarchitect/thisweek09/0828/0828b_redcredits.cfm).

Section 179D and the R&D Tax Credit belong to a group of provisions collectively known as tax extenders.  These provisions are not permanent parts of the tax code but are typically renewed retroactively each year by Congress.  Section 179D and the R&D Credit have lapsed for 2015, but taxpayers may go back to capture past incentives and are encouraged to continue preparing to apply for them in anticipation that they will be renewed.

Many tax provisions relate specifically to buildings and other types of tangible property, and strategic application of these provisions may result in substantial savings for building owners. Architecture firms that have constructed or purchased a building during the tax year may use cost segregation, a strategy that reclassifies certain real property assets into tangible personal property.  Cost segregation results in accelerated depreciation deductions and eases the process of writing off assets that have become obsolete, reducing tax liability and substantially improving cash flow for the building owner.  Taxpayers seeking to apply cost segregation are advised to obtain an engineering report, which divides the property into distinct categories based on the useful lives of specific assets. (Source: http://journalofaccountancy.com/issues/2014/feb/20137725.html).

Architecture firms may also discover tax savings by ensuring that they are correctly applying the tangible property regulations detailed in §263(a) of the Internal Revenue Code.  The tangible property regulations have been in a state of flux since 2008, resulting in confusion to taxpayers.  These regulations affect all taxpayers that acquire, produce, or improve tangible property, including buildings or equipment.  The new rules allow taxpayers to expense certain costs and capture losses for assets with long useful lives, such as HVAC or structural components that they may not have reported previously due to confusion in the old regulations.  By claiming additional deductions and losses as permitted by the latest tangible property regulations, taxpayers may significantly bolster their bottom lines through tax savings.  (Source: CRG’s Tangible Property Regulations White Paper).