As the deadline of filing for the 2019 tax return draws nearer, business tax service firms are advising providers of architectural and engineering services to take caution when claiming an older tax cut, known as the Research & Development or R&D Tax Credit.
The R&B tax credit is available to businesses that meet the criteria prescribed by the 1981 legislation that enacted this tax cut. As the R&D tax credit became permanent in 2015, IRS statistics show that nearly one-third of its claimants are taxpayers who provide professional services as a business, including architects. Collectively, the IRS identifies these service providers as Specified Service Trade or Business or SSTBs.
However, in 2016, the IRS established a division to undertake review of the returns filed by businesses with less than $10 million in assets. Known as the IRS Small Business/Self-Employed (SB/SE) Division, its examiners held the position that SSTBs like architects and engineers, do not provide services that would qualify their activities as meeting the criteria of the R&D Tax Credit.
As a result, the said professionals were disqualified from applying the R&D Tax Credit as a means of reducing their tax liability for the related tax year/s.
Still, architectural or engineering businesses that have more than $10 million in assets might not experience the same disqualification. Their tax returns are reviewed by examiners of the IRS Large Business and International (LB&I) Division, which still consider architectural and engineering businesses eligible for assessment; not undermining their potential to satisfactorily meet the Business Component Test related to the R&D Tax Credit.
What are the Criteria that Businesses Must Meet in Order to Qualify for the R&D Tax Credit
The R&D tax credit defines research as a tool for satisfying the need to carry out the following purposes;
- Eliminating elements of uncertainty that can adversely affect the results of the product or service offered by the business
- Facilitating or reducing time spent in the process of experimentation.
- To efficiently and effectively provide products or services that are technological in nature.
- Achieving the qualified purpose or permitted purpose of the business, which in the new Business Component Test specifies product or service that requires research for developing or improving new functionality or performance.
In addition, the IRS Small Business/Self-Employed (SB/SE) examiners also review the acceptance and payment terms related to the architectural or engineering service contract. That way, it can be established if the cost of research is part of the fees collected by architects or engineers from their customers.
If so, it technically means the cost of research was funded by the client who contracted the service, and not by the architect or engineer who provided the professional service.