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Architecture & Engineering Firms

Year-End Tax Planning: 5 Considerations for Your A&E Firm

Posted on November 9, 2022 by

Ryan Kandt

Ryan Kandt

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A&E Year-End TaxAs another tax season approaches, an annual check of your architecture and engineering (A&E) firm’s vital signs can help position you for profitable year-end adjustments. Here are the top five questions you should be asking about your company’s tax and financial health.

1. Are my tax and financial plans aligned with my firm’s strategic direction?

What is your firm’s overall strategy right now? Some owners may prioritize long-term growth, while others may be starting to think about transitioning out of ownership. Firms that focus on growth want to retain capital to invest in new technologies, key hires or extending geographical reach. Firms that focus on succession planning may want to take more cash out of the business in ways that minimize taxable events.

2. Am I taking full advantage of available tax reduction opportunities?

Recent legislative changes make it essential for A&E firms to check eligibility for various tax credits. Some are straightforward, while others are complex and require rigorous record keeping. Here is a brief list of several credits worth investigating.

  • Research and Development – This credit reaches back several decades but continues to be renewed and revised. The R&D Tax Credit incentivizes businesses to invest in innovations that lead to job creation. You do not need a major invention or even a successful one to be eligible. Simply showing records on improving an existing process may be enough to claim the credit.
  • Employee Retention – The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit for wages paid by an employer whose business was partially or fully interrupted by a Covid-19-related public health orders, or experienced a 20% or greater decline in gross receipts from the same calendar quarter in the previous year. Employers can get immediate relief regardless of tax liability.
  • Section 179 Deduction – Section 179 of the Internal Revenue Code allows a deduction of the full price of qualifying equipment and software purchased or financed in the current tax year. Interestingly for A&E firms, this includes a deduction of up to $1.80/SF for energy-efficient building systems, including heating, cooling, lighting and the building envelope itself.
  • Section 45L Deduction – Internal Revenue Code Section 45L provides a dollar-for-dollar offset against taxes paid or owed in the tax year in which energy-efficient single- or multi-family residential units are sold or leased and occupied by the resident. This credit can be taken on an amended return and can also be carried forward for up to 20 years.

3. Am I filing correctly for my state’s flow-through entity laws?

State tax laws have changed, and it is important to revisit state filings to avoid tax surprises. Pass-through entity taxes can be taken as a partnership or S Corporation deduction that flows through to the partners without limitation. Members of a pass-through entity either receive a credit against their individual state income tax liability or deduct their distributed income share from their adjusted gross income to determine state tax liability.

4. Are my transaction or exit plans up to date?

Tax planning season is an ideal time to take a fresh look at the implications of M&A transactions you may be evaluating, or to compare various exit scenarios if you are considering retirement. In both instances you will need reliable valuations of your business today, as well as target valuations for when you are ready to move ahead with a merger or acquisition, or when you plan to eventually exit your ownership position in the business

5. Am I properly incentivizing my best employees to stay with the firm?

A successful A&E business depends on the engagement and performance of the people who deliver the work. As you move through your tax planning regimen, pay attention to the way you invest in your employees through compensation, benefits and incentive programs that encourage your key performers to stay with the firm. These might include employee stock ownership plans, bonuses or alternative forms of equity participation.

Continue the Conversation

Clayton & McKervey has deep expertise in tax planning for successful architecture and engineering firms. Our A&E practice also provides expert advice in financial reporting, succession planning, ESOPs and overhead audits. We look forward to talking with you about your individual business situation. Contact us today to learn more.

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Ryan Kandt

Manager, Tax

Ryan supports architecture and engineering clients with tax planning, compliance and tax credits.

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