Principals Roundtable Recap: R&D: A Popular Tax Strategy for AEC Firms
Posted by StarChapter on Feb. 16, 2021 / Subscribe 0
According to financial experts speaking to the SMPS Principals Roundtable earlier this month, credits for research and development (R&D) can offer significant tax savings to architectural and engineering firms, particularly in light of changes in tax laws in recent years. The subject of R&D tax credits was one of several topics presented at this month’ Principal’s Roundtable by Diana Strassmaier and Daniel Larson, two financial/tax professionals from Aldrich Advisors.
The purpose of this Roundtable, sponsored by Dersch Design & Engineering, was to give principals of the San Diego Chapter of SMPS an overview of the current status of professional and personal wealth strategies for the AEC industry. Topics included:
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Company organization – the pros and cons of different organizational structures and how they may impact a company’s financial future
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Owning office property – pitfalls and possibilities
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Investing in the business – when, why and how
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Compensation strategies – for principals and other employees
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Tax strategies and discussion – e.g. R&D credits, cost segregation and potential tax changes
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Personal investment planning – thoughts and discussion
The team from Aldrich summarized the primary features of each category in the context of changes to tax laws in recent years. For example, what may have been beneficial from a tax point of view for a company when first organized may not be the most beneficial now. On the other hand, tax laws are always fluid so it may not make good business sense to make major changes with each tax law change.
Is it feasible for a company to own real estate? To answer that question, principals must evaluate the cost of ownership versus paying rent for 20 or more years. This is particularly important in the context of the changing business environment in the wake of the pandemic.
The structure of compensation packages is also critical for principals to understand because of the impact these compensation packages have on overhead rates allowed by clients, particularly institutional clients.
But the topic generating the most interest among principals was that of R&D credits and how they work with the AEC industry. Larson led this area of the discussion and had a few pointers for the group:
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Tax savings resulting from R&D credits can be significant;
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Tax law changes to R&D credits make them more favorable for architects and engineers to take than they were previously;
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In general, an R&D tax credit filed under a fixed-fee contract has a better chance of approval than under cost plus or other types of contracts; and
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An example of an R&D situation for an architect or engineer to consider would be the development of an energy efficient solution in the design or construction of a structure.
In summary, it’s highly recommended that firms work with R&D specialists who can put firms in a favorable position to build a strong case to support the submission of the credit.
Noting the fluidity of state and federal tax laws and regulations and their potential impact on a business, the advisors highly recommended that firms work with financial/tax professionals who know current laws and regulations and who understand the nature of the AEC industry.
Beth Bateman, Owner, Bateman Communications, Past President, SMPS San Diego
The Principals Roundtable is a series of quarterly meetings sponsored by the Chapter to provide principals with a forum to discuss issues of importance to the industry. The next Roundtable, sponsored by Neri Landscape Architecture, will be a virtual meeting on May 4 from 11:30 AM to 12:45 PM. Neri will select a topic for discussion to be announced later. The Roundtable Planning Committee will provide attendees with Power Point slides and links to their research on the topic. Watch this site for updates and registration information.
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