Two tax savings considerations for architecture and engineering firms
INSIGHT ARTICLE |
Is your architecture or engineering firm taking advantage of key tax opportunities? While assessing your options, consider the domestic production activities deduction (DPAD) or an interest charge—domestic international sales corporation (IC-DISC), two important tax incentive possibilities that could provide benefits related to your architecture and engineering activities. These tax incentives are generally considered for manufacturers, but architecture and engineering firms may benefit as well. Note the following:
Domestic production activities deduction
The DPAD is a special federal tax deduction provided to encourage production activities in the United States. It is available to companies that manufacture tangible personal property, develop software, mine natural resources—to name a few eligible activities—or to firms that perform architecture or engineering services. In its current form, the DPAD provides a permanent federal income tax deduction for qualifying U.S. domestic businesses.
To use the DPAD, an architecture or engineering firm should:
- Identify which gross receipts qualify for the deduction
- Determine how much of the business’ costs and expenses are attributable to qualifying domestic gross receipts
- Finally, determine the firm’s qualified production activity income (QPAI); this is calculated by taking the domestic gross receipts and subtracting the allocable costs and expenses, and then comparing this number to taxable income. The lesser of QPAI or taxable income is then multiplied by 9 percent to determine the DPAD.
Interest charge—domestic international sales corporation
An IC-DISC can be a powerful tax savings opportunity for many companies exporting products and services abroad. Specific to architecture and engineering firms, services related to construction projects, such as the erection, expansion, or repair of buildings or physical facilities located outside the United States, may qualify for the IC-DISC tax benefit. Services may be performed either within the United States or abroad and are included whether or not the project is actually completed. In its current form, the IC-DISC provides a permanent federal income tax savings of nearly 16 percentage points for qualifying U.S. exporters.
To leverage an IC-DISC, an architecture or engineering firm should:
- Create a domestic corporation to become the IC-DISC and elect IC-DISC status
- Pay the IC-DISC a commission based on the profitability of export sales; the size of the commission is determined under specific statutory rules
- Deduct commission owed to the IC-DISC from its ordinary income, taxed at a maximum federal rate of 39.6 percent
- The IC-DISC does not pay federal income tax on the commission received from the exporting firm
- Shareholders that are individuals or trusts pay federal income tax on dividends at a maximum rate of up to 23.8 percent
- The result can be up to a 15.8 percentage point federal tax savings on IC-DISC commissions
These tax incentives for architecture and engineering firms may be available for your business. To assess your opportunity, consult with a tax advisor that is experienced with helping firms like yours benefit from these programs.