Employee Retention Tax Credit for Architecture Firms
The architecture industry has been hit hard by the COVID-19 pandemic. With many firms experiencing a decline in revenue, they have been forced to take drastic measures such as laying off employees to stay afloat. However, the Employee Retention Tax Credit (ERTC) is a lifeline for architecture firms, providing a refundable payroll credit of up to $5,000 per qualified employee for 2020 and $7,000 per employee per quarter in 2021. In this article, we will take a deep dive into the ERTC for architecture firms, including eligibility criteria and strategies to maximize the tax credit.
Eligibility Criteria for the ERTC
The eligibility criteria for the ERTC differ between the 2020 and 2021 credits.
2020 ERTC Eligibility Criteria
According to Deltek, a company can qualify for the 2020 ERTC if it has a 50% revenue drop compared to the equivalent 2019 quarter's revenue or if it is fully or partially shut down due to a government order.
2021 ERTC Eligibility Criteria
For the 2021 ERTC, a company can qualify if its revenue for the quarter is 20% below the same quarter in 2019, and if it has less than 500 employees, it can qualify for a quarterly credit of 70% of wages up to a max quarterly credit of $7,000 per employee.
Importance of Consulting an Expert
Navigating the ERTC can be complex, and it is recommended to consult an expert to ensure that your architecture firm is taking full advantage of the tax credit.
Understanding the Employee Retention Tax Credit for Architecture Firms
To take full advantage of the ERTC, it is important to understand the eligibility criteria for both the 2020 and 2021 credits. In this section, we will provide a detailed explanation of the eligibility criteria and the importance of consulting an expert.
Eligibility Criteria for the 2020 ERTC
As mentioned in the previous section, a company can qualify for the 2020 ERTC if it has a 50% revenue drop compared to the equivalent 2019 quarter's revenue or if it is fully or partially shut down due to a government order. It is important to note that the same wages cannot be used for both the Paycheck Protection Program (PPP) loan forgiveness and ERTC.
Eligibility Criteria for the 2021 ERTC
For the 2021 ERTC, a company can qualify if its revenue for the quarter is 20% below the same quarter in 2019, and if it has less than 500 employees, it can qualify for a quarterly credit of 70% of wages up to a max quarterly credit of $7,000 per employee. The wages used to calculate the ERTC can include qualified health plan expenses.
Importance of Consulting an Expert
Navigating the ERTC can be complex, and it is recommended to consult an expert when trying to maximize the tax credit. Anchin emphasizes the importance of understanding the nuances of the ERTC, noting that even the slightest error could result in substantial penalties for your architecture firm. Consulting an expert can help you avoid these penalties and ensure that your firm is taking full advantage of the ERTC.
Maximizing the Employee Retention Tax Credit for Architecture Firms
Now that we have a clear understanding of the ERTC eligibility criteria, it is important to explore strategies that architecture firms can implement to maximize the tax credit. In this section, we will discuss strategies to reduce employee turnover and calculate the maximum credit amount.
Strategies to Reduce Employee Turnover
Employee turnover can be costly for architecture firms, and reducing turnover is an effective way to maximize the ERTC. Here are some strategies to reduce employee turnover:
- Competitive compensation packages: Offering competitive salaries and benefits can attract and retain top talent.
- Professional development opportunities: Investing in employee training and development can increase employee satisfaction and retention.
- Flexible work arrangements: Offering flexible work arrangements such as remote work or flexible schedules can improve employee work-life balance and retention.
Calculating the Maximum Credit Amount
To calculate the maximum credit amount, you need to determine the average number of full-time employees during the applicable period and the total qualified wages and health plan expenses paid during the applicable period. The maximum credit per employee is $5,000 for 2020 and $7,000 per employee per quarter for 2021.
Deltek provides an example calculation for the ERTC:
Assume that an architecture firm had 50 employees in Q3 2021. It paid $600,000 in qualified wages and health plan expenses during Q3 2021. The architecture firms revenue in Q3 2019 was $2 million, and its revenue in Q3 2021 was $1.5 million, a difference of 25%. The architecture firm is eligible for the ERTC for Q3 2021 and can claim a credit of $7,000 per employee, or $350,000.
Impact of the Tax Credit on Cash Flow
The ERTC is a refundable payroll credit, meaning that it can be used to offset payroll taxes or be refunded as cash. This can have a significant impact on your architecture firms cash flow, as it can provide a much-needed injection of cash during difficult times.
R&D Tax Credits for Architecture Firms
In addition to the ERTC, architecture firms can also take advantage of research and development (R&D) tax credits. In this section, we will explore R&D tax credits and their benefits for architecture firms.
Eligibility for R&D Tax Credits
According to KBKG, architecture and engineering companies can receive cash savings through R&D tax credits for developing new or improved products and processes. Many companies are unaware of their eligibility for R&D tax credits.
Qualifying activities for R&D tax credits in the architecture industry include:
- Developing new or improved building designs
- Evaluating alternative designs
- Using building information modeling (BIM) and computational analysis tools
- Developing innovative sustainable design solutions
Benefits of R&D Tax Credits
R&D tax credits can provide significant benefits for architecture firms, including:
- Cash savings: R&D tax credits can provide a cash benefit for firms that would otherwise have to pay taxes.
- Reduced tax liability: R&D tax credits can reduce a firm's tax liability, freeing up funds for reinvestment in the business.
- Competitive advantage: Investing in R&D can lead to innovative design solutions that differentiate your firm from competitors.
Consulting an Expert
Navigating R&D tax credits can be complex, and it is recommended to consult an expert to ensure that your architecture firm is taking full advantage of the tax credit. Tax Point Advisors can help businesses determine their eligibility for R&D tax credits and provide guidance on how to maximize the tax credit.
IRA Incentives and Bonus Depreciation
In addition to the ERTC and R&D tax credits, there are other tax incentives that architecture firms can take advantage of. In this section, we will explore IRA incentives and bonus depreciation.
IRA Incentives
IRA incentives are designed to encourage architecture firms to establish retirement plans for their employees. By providing a retirement plan, architecture firms can attract and retain top talent while also benefiting from tax savings.
The most common IRA incentives for architecture firms are:
- Simplified Employee Pension (SEP) plan
- Savings Incentive Match Plan for Employees (SIMPLE) plan
- 401(k) plan
Each plan has its own eligibility criteria, contribution limits, and tax benefits, so it is important to consult an expert when choosing a retirement plan for your architecture firm.
Bonus Depreciation
Bonus depreciation allows architecture firms to deduct a certain percentage of the cost of new equipment in the year it is placed in service. According to the AIA, the bonus depreciation rate is currently set at 100% for qualified property placed in service after September 27, 2017.
Qualified property includes:
- Machinery and equipment
- Office furniture and equipment
- Computers and software
- Qualified leasehold improvement property
Bonus depreciation can provide substantial tax savings for architecture firms that invest in new equipment, so it is important to keep this tax incentive in mind when making purchasing decisions.
Consulting an Expert
As with the other tax incentives discussed in this article, it is recommended to consult an expert when trying to take advantage of IRA incentives and bonus depreciation. An expert can help you choose the retirement plan that best fits your architecture firm's needs and ensure that you are maximizing the tax benefits of bonus depreciation.
Wrap Up
In conclusion, architecture firms can benefit from a variety of tax incentives, including the employee retention tax credit, research and development tax credits, IRA incentives, and bonus depreciation. By taking advantage of these tax incentives, architecture firms can improve their cash flow, reduce their tax liability, and attract and retain top talent.
It is important to consult an expert when trying to navigate these tax incentives to ensure that you are maximizing their benefits and avoiding any potential pitfalls.
Thank you for reading this article. Check out our other great content for more tips and strategies to help your architecture firm succeed.
Answers To Common Questions
Who is eligible for the employee retention tax credit for architecture firms?
Architecture firms with less than 500 employees that have experienced a revenue decline in 2021.
What is the employee retention tax credit for architecture firms?
The ERTC is a tax credit that provides a quarterly credit of up to $7,000 per employee.
How can architecture firms claim the employee retention tax credit?
Firms can claim the ERTC by filing Form 941 with the IRS.
Who can architecture firms consult for guidance on the employee retention tax credit?
Experts such as tax preparers or consultants can provide guidance on the ERTC.
What is bonus depreciation for architecture firms?
Bonus depreciation allows firms to deduct a percentage of the cost of new equipment in the year it is placed in service.
How can architecture firms qualify for research and development tax credits?
Firms can qualify for R&D tax credits by developing new or improved products and processes.