A&E projects have the potential to save millions through various tax credits and incentives, as seen with a recent $13 million building conversion project in Syracuse, New York, that secured nearly $2 million in tax breaks.
Utilizing specific tax benefits can be a powerful tool for supporting a project’s budget, as well as promoting economic growth and fostering sustainable development. To maximize the benefits and avoid missed opportunities, A&E firms must understand the best practices and risks associated with these programs.
Effective Strategies To Maximize Tax Benefits for A&E Firms
Our tax professionals help A&E firms identify and apply for tax incentives that align with their business goals and mission. Some of the tax benefits A&E entities can take advantage of to help drive economic growth while reducing costs include:
1. Research and Development (R&D) Tax Credits
R&D tax credits are designed to incentivize companies to invest in research and development activities. Offered at the federal level — and by some states — the R&D tax credit allows companies to offset their income taxes, helping them reduce research costs and create a cash flow.
While many might imagine technology and life science companies using this program, A&E firms can also claim R&D tax credits for activities such as developing new designs, improving existing designs and testing new materials.
Tax years beginning after December 31, 2021, require taxpayers to capitalize and amortize specified research and experimental expenditures (SREs) over 5 years for domestic and 15 years for foreign research. The capitalization requirements around R&D expenditures calls for a detailed analysis of credit-eligible costs, which helps companies develop a reasonable methodology to minimize annual capitalization.
2. Cost Segregation
Cost segregation is a tax planning strategy that allows A&E firms to accelerate depreciation on property and equipment. By segregating assets into different categories, firms can reduce their tax liability and improve their cash flow.
Conducting a cost segregation study helps organizations determine and separate a portion of a building or equipment’s cost basis into a shorter-lived asset. This typically makes the asset(s) eligible for bonus depreciation.
3. Section 179D Energy Efficient Commercial Building Deduction (Section 179D)
The Section 179D tax deduction is a tax incentive available to the owners and designers of energy-efficient commercial buildings. Renovation and constructions projects may qualify if they include installation of certain energy-efficient systems.
There are two parts to this tax benefit, a base deduction of 58 cents per square foot with a 2-cent increase for every percentage point over the minimum efficiency threshold, and an enhanced deduction of $2.90 per square foot with an added 12-cent increase for every percentage point above the threshold.
A&E firms can claim Section 179D deductions for designing energy-efficient lighting, HVAC and building envelope systems. Qualifying buildings include schools, universities, airports, courthouses, libraries, religious institutions and tribal or Native American owned buildings.
4. Energy Tax Credits & Incentives
In addition to Section 179D deduction, there are other energy tax credits and incentives available that A&E firms may take advantage of. These include tax credits for installing solar panels, wind turbines, thermal energy management, batteries and other renewable energy systems.
Tips For Claiming A&E Tax Incentives
Learn more about claiming the above tax benefits with advice from our Professional Services industry professionals:
Determine Eligibility
Once the relevant tax incentives are identified, our team reviews the eligibility criteria to make sure a firm meets the requirements. While working on new projects, we also help determine any past or current projects that may be eligible for tax incentives.
By identifying and applying for tax credits and incentives, A&E firms can enhance their projects, reduce their tax liability and ultimately improve their bottom line.
Maintain Proper Documentation
A&E firms should maintain proper documentation and records to support their application for tax incentives. This may include financial statements, tax returns and project specifications.
Proper documentation is essential for demonstrating the impact of the incentives on the firm's financial position and compliance with the eligibility criteria. It can also help firms respond to any questions from tax authorities or other stakeholders.
Avoid Risks With Professional Help
When applying for tax incentives, A&E firms may encounter several potential risks, including:
- Lack of Eligibility
- Lack of Compliance
- Complex Application Processes
- Changes in Tax Laws
- Potential for Fraud
The application process for tax incentives can be complex and time-consuming, and tax laws and regulations can change quickly, potentially impacting eligibility and overall benefit. Additionally, tax credits and incentives can be subject to abuse or misuse by businesses or individuals seeking to exploit the program for their own benefit.
To avoid these risks, A&E firms can work with tax professionals who focus in the industry, maintain proper documentation and records, and comply with the eligibility criteria. Tax professionals can help avoid noncompliance by reviewing eligibility criteria and the application process, while also providing insights on best practices for maximizing the benefits of tax incentives.
Your Guide Forward
With decades of specialized experience, our team helps A&E firms effectively navigate these tax considerations to identify opportunities and realize tax savings. Cherry Bekaert’s Tax Credits & Incentives Advisory (TCIA) team is dedicated to staying informed on the latest A&E tax updates. Please reach out to the TCIA team if you want to explore tax incentives for your business.
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