Atlanta and the Southeast have seen significant expansion of commercial and residential construction over the past year. These construction projects are a very positive sign that we, as a community, are recovering from the recent recession. This means new jobs, innovation and expansion of businesses into our area.
As a result of this economic resurgence, Engineering and Architectural firms, as well as many other businesses in the construction industry, need to be aware of some very significant federal and state tax saving incentives that can immediately impact their bottom lines in a positive way.
Federal and State Tax Incentives
Domestic Production Activities Deduction
Many engineering and architectural firms may not realize that their efforts in developing real property qualify for the Domestic Production Activities Deduction. The name seems to imply manufacturing of goods. However, there are certain clauses in the Internal Revenue Code and regulations that allow companies in the construction industry to take advantage of this incentive as well. The Domestic Production Activities Deduction was placed into law in 2005. Since 2009 the incentive allows companies that are profitable and paying federal taxes a 9% extra deduction on Qualified Production Activities income (QPAI). QPAI is defined as domestic production gross receipts less the sum of cost of goods sold and other expenses that are allocated to the production of the qualified activities. For example, an engineering firm that is involved in the engineering or architectural services relating to the construction or renovation of an office building or manufacturing facility can take an extra 9% deduction of the profits associated with this contract. Project tracking is very important for engineering and architectural firms. There are many ways to allocate other non-direct costs. Companies should look carefully at these various allocation methods to ensure they are maximizing their deductions.
Energy Efficient Commercial Buildings Deduction
In most situations this deduction goes to the owner of the building. However, if the contractor is performing construction or engineering and design services for federal, state, or local governmental entities, those entities can designate a deduction to the contractor of up to $1.80 per square foot of the facility. The requirement is that the contractor must obtain certification from the governmental entity. The project must increase energy efficiency for the government building by the standards of the American Society of Heating, Refrigerating and Air Conditioning Engineering and the Illuminating Engineering Society of North America, standard 90.1-2001, at minimum.
The most prevalent engineering design systems for this incentive will relate to lighting, heating and air conditioning and the building envelope, i.e., windows, doors and similar components.
The engineering firm performing such services for a governmental entity should be aware of these incentives during the request for proposal stage of the engagement to ensure these discounts are being considered as part of the proposed fees. The governmental entity can choose to give the deduction to one or to multiple contractors associated with the project.
Research & Development (R&D) Tax Incentives
This federal credit has been around since 1984 and many states have over time adopted their own versions of the credit. The original credit calculation, which still exists today, requires a company to evaluate qualifying research activities from 1984 – 1988. It is administratively difficult for many companies to try to gather appropriate financial records this far back in time. However, some companies are able to and can successfully claim and defend their R&D credits using this method. Many companies are moving to the Alternative Simplified R&D credit method which essentially requires the company to determine their qualified research expenses for the three previous years, and then take the average of those three years multiplied by 50% to arrive at a base amount. The company can then take a credit equal to 14% of the current year qualified research expenses that are greater than the 50% average of the three prior years as a tax credit. The credit can also be carried forward for 20 years.
State R&D credit programs vary from state to state. Florida and Virginia require very early applications to request the credit. Georgia recently allowed companies to utilize the R&D credit against income or payroll withholding. Louisiana has recently enacted that the R&D tax credit is refundable.
For engineering firms, many of the unique problems that are being solved for clients may qualify for the R&D tax credit. The determination is driven by facts and circumstances. For example, an engineering firm that is contracted to build a building or bridge in an area prone to wind, soil erosion, flooding, or other similar natural disasters or potential terrorist threats may qualify their costs and efforts relating to solving or mitigating these potential issues for their clients.
There is also the option of taking advantage of the federal R&D deduction. This deduction has been in the federal tax code in various forms since 1954. The law allows a company to take a deduction for expenses relating to development of a product, process, technique or other scientific efforts and allows expenses to be deducted that are much broader than those allowed for the R&D tax credit. However, the analysis of whether the deduction is available is the first step in determining if the R&D credit is even a possibility.
Historic Building Rehabilitation Incentives
Owners of certain historic buildings are able to take federal and state tax credits on the restoration of these buildings. Engineering and architectural firms need to be aware of these tax incentives during the request for proposal stage of a contract negotiation. The federal credit can generally provide the owner a 10% federal tax credit for buildings originally placed in service before 1936 and a 20% credit for renovation of certified historic structures. In many cases, these federal and state incentives will reduce the cost for the owner of the property by offsetting the costs of the professional services fees paid to the engineering and architectural firms.
Job and Other State Tax Credits and Incentives
Most southeastern states have created substantial tax incentives to attract businesses to move to or expand within their states. Some of these incentives include jobs tax credits, low interest loan programs for solar and other alternative energy, opportunity zone tax credits and property tax incentives for energy efficient construction projects. The state incentives vary from state to state, but there are many opportunities for engineering and architectural firms to explore.
Engineering and architectural firms should be aware of all of the tax incentives that are available to them and their customers. It is a two pronged evaluation to saving money for your company; you can directly benefit from the tax incentives and increase your profits and you can use your knowledge of tax incentives to improve your chances to win business by having a deeper understanding of the tax incentives available to your customers.
Bennett Thrasher has recently created a comprehensive team and methodology to provide your company the knowledge to evaluate all federal and state tax credits and incentives that are available to you and your customers. Our team of federal and state tax experts include: Peter Stathopoulos, Torie Barry and Jeff Call. Please contact our team at 770.396.2200 and ask for one of our team members.