Tax changes and incentives architecture firms should know about

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["b"],["i"],["a",["href","https:\/\/engineeredtaxservices.com\/","target","_blank"]],["a",["href","mailto:hhenderson@engineeredtaxservices.com","target","_blank"]],["em"]],"sections":[[1,"h2",[[0,[],0,"Taxes are rarely fun, but a range of incentives can help your firm and your clients save money. AIA partner Engineered Tax Services offers an overview."]]],[1,"p",[[0,[],0,"Each new year, many people reflect on the previous year\u2019s successes and failures and begin looking forward to new goals and future plans. The new year also rings in a review of financial statements, tax preparation, and budgeting. Taxes are rarely fun, but the tax code has a plethora of sections to incentivize business owners and offer funds to reimburse eligible costs for behaviors that are societally impactful. "]]],[1,"p",[[0,[],0,"These incentives change on a regular basis, so following is a summary of some of these tax changes and incentives that are applicable to many architectural firms."]]],[1,"h3",[[0,[0],1,"Technical innovation and social impact"]]],[1,"p",[[0,[],0,"The increasing research credit (R\u0026D) is an incentive for businesses that invest in innovation, testing, or creating new products or designs. This credit was originally adopted in 1981 and has been expanded many times since then. When the IRS created the four-part test, it redefined that qualified activity only needed to be new to the business, not new to the industry as a whole. Many activities performed by architects can qualify when they are backed by a scientific process of engineering, trial and error, and the elimination of uncertainty. "]]],[1,"p",[[0,[],0,"This tax credit averages 6% of eligible costs, which are mostly based on salaries and wages. So a firm with $250,000 of wages that were attributed to the conceptual and schematic design of unique and innovative projects could qualify for a credit of approximately $15,000, and in some states that is matched at the state level. "]]],[1,"p",[[0,[],0,"One major change took effect on January 1, 2022, and stipulates that R\u0026D expenses can no longer be deducted as business expenses, but must be capitalized and amortized over five years for U.S.-based costs or 15 years for international costs. Using the same example, with $250,000 of wages related to R\u0026D, only $50,000 would be deductible in the first year, rather than the full amount. Therefore, a business would be subject to a much higher tax liability until these amortized costs stack over the following years. "]]],[1,"p",[[0,[],0,"This is an important discussion to have with your tax preparer or consultant for effective tax planning and to decide on the best path forward with regard to claiming these valuable credits or not. "]]],[1,"h3",[[0,[0],1,"IRA incentives for energy-efficient buildings"]]],[1,"p",[[0,[],0,"The Inflation Reduction Act was passed in late 2022 and included the extension and expansion of 45L tax credits, 179D deductions, and other sustainability measures. Both 45L and 179D were originally adopted in 2005, but the extension has refined them as follows: "]]],[3,"ul",[[[0,[],0,"45L tax credits are applicable to any single-family or multifamily units of any height and have a three-tier benefit. A $500 tax credit per unit for energy-efficient (EE) units. It jumps to $2,500\/unit for EE where prevailing wages were met for all laborers, or a bonus deduction of $5,000\/unit if the units are net-zero ready. The tax credit applies to building owners, but architects should be aware of this and the energy requirements to help their clients claim these credits. "]],[[0,[],0,"179D deductions apply to energy-efficient commercial buildings or high-rise multifamily (four+ stories) that are energy efficient. The deduction ranges from $0.50 per square foot up to $5.00 per square foot depending on the level of efficiency and if prevailing wage and apprenticeship mandates were met. For architects, this deduction can be allocated to the designer for any public projects, but also for non-profit or tribal projects, which has been a long-awaited change!"]]]],[1,"h3",[[0,[0],1,"Bonus deduction phase-out"]]],[1,"p",[[0,[],0,"Another significant benefit of the current tax code is bonus depreciation, which allows business owners to immediately deduct eligible purchases for business assets that have a depreciable life of 20 years or shorter. This would apply to vehicles, equipment, machinery, leasehold improvements, and personal property that is acquired as part of a real estate purchase. "]]],[1,"p",[[0,[],0,"In the case of real estate, Cost Segregation can be applied at the time of purchase to itemize all of the building\u2019s components to separate the finishes such as flooring, fixtures, window coverings, landscaping, parking lots, and signage (for example), to claim an immediate deduction rather than write them off over the structural timeline of 39 years. "]]],[1,"p",[[0,[],0,"Bonus depreciation begins to phase out in 2023, which has dropped from 100% in 2022, to 80% in 2023, 60% in 2025, and 40% in 2026. On average, an office building might see 20% to 30% of their building costs allocated to personal property. This means on a building purchase of $2,000,000, the accelerated depreciation could be as much as $320,000 to $600,000 in first-year deductions! This is advantageous to investors, designers, and business owners. "]]],[1,"p",[[0,[],0,"This strategy can also be applied retroactively for the 2022 tax year if applied before the tax returns are filed. "]]],[1,"h3",[[0,[0],1,"Employee retention credits"]]],[1,"p",[[0,[],0,"This COVID-era stimulus credit applies to employers who retained their employees during COVID and were faced with either a reduction in gross receipts from 2019 to 2020 or 2021, or were impacted by mandated shutdowns or business restrictions that hindered their ability to operate at full capacity. "]]],[1,"p",[[0,[],0,"This is a credit where many bad apples have begun to aggressively pursue these credits on behalf of business owners and are promising eligibility based on supply chain issues or other unsupported claims. Although the credit is a valuable benefit to qualified employers, it is vital to work with your trusted advisors or firms that have a track record of success over a long period of time and have not been created simply for the sake of claiming the ERC and will likely be gone before the IRS begins a review of these credit claims. "]]],[1,"p",[[0,[],0,"ERC is available for three years from the date of the quarterly 941 filings from Q2 of 2020 through Q3 of 2021."]]],[1,"h3",[[0,[0],1,"Action points"]]],[1,"p",[[0,[],0,"In summary, each of these strategies can be retroactive and either applied to the 2022 tax year or as far back as 2019 by amending the returns. Although these each represent complex areas of the tax code, you can consult your CPA or seek out a reputable firm for additional guidance. "]]],[1,"p",[[0,[1,2],1,"Engineered Tax Services"],[0,[],0," is a specialty tax firm that focuses on tax-related incentives and the engineering principles to review and support these complex areas. If you have additional questions, please contact Heidi Henderson at Engineered Tax Services via email at "],[0,[3],1,"hhenderson@engineeredtaxservices.com"],[0,[],1,"."]]],[1,"p",[[0,[4],1,"AIA does not sponsor or endorse any enterprise, whether \npublic or private, operated for profit. Further, no AIA officer, \ndirector, committee member, or employee, or any of its component \norganizations in his or her official capacity, is permitted to approve, \nsponsor, endorse, or do anything that may be deemed or construed to be \nan approval, sponsorship, or endorsement of any material of construction\n or any method or manner of handling, using, distributing, or dealing in\n any material or product."]]]]}