By Martin E. Prendergast
Gray, Gray & Gray, LLP

With architecture and engineering firms facing increased operational costs and competitive pressures, optimizing tax strategy becomes crucial for maintaining profitability. This white paper explores the five most significant tax deductions specifically relevant to large architecture and engineering practices, with particular attention to recent tax code changes and strategic implementation.

1. Equipment and Technology Infrastructure

Section 179 of the Internal Revenue Code provides particularly valuable benefits for large firms making substantial technology investments. For 2024, firms can immediately expense up to $1,220,000 in qualifying equipment purchases, with the deduction beginning to phase out when total purchases exceed $3,050,000. This applies to essential infrastructure such as server systems, workstation clusters, and large-format printing equipment.

Beyond Section 179, bonus depreciation remains available for qualifying purchases exceeding these thresholds. Enterprise-level software implementations, including firm-wide BIM platforms and project management systems, may qualify for immediate expensing under current regulations. Firms should carefully evaluate the strategic timing of major technology investments to optimize these benefits within their broader tax planning framework.

2. Professional Development and Talent Investment

Large firms often invest substantially in employee development and talent retention programs. These expenses, including in-house training programs, external professional development, and continuing education support, are fully deductible. This extends to firm-wide licensing and certification programs, professional membership support, and technical training initiatives.

The scale of these programs in larger firms often justifies creating dedicated training facilities or learning management systems. The costs associated with these facilities, including specialized equipment and software, may qualify for accelerated depreciation treatment. Additionally, firms supporting employees’ advanced degree programs can structure these benefits to be tax-advantaged for both the firm and employees through careful program design.

3. Facilities and Infrastructure Deductions

For firms operating multiple offices or maintaining significant physical infrastructure, facility-related deductions represent a major tax consideration. Cost segregation studies can identify opportunities to accelerate depreciation on building components, potentially creating significant tax savings. Modern architectural and engineering offices often include specialized spaces like model shops, materials libraries, and testing facilities, many of which may qualify for shorter depreciation schedules.

Recent tax law changes have also enhanced the benefits available for energy-efficient building improvements. Firms can leverage these provisions both for their own facilities and as expertise they can offer to clients, creating additional value streams while optimizing their tax position.

4. 179D Commercial Buildings Energy-Efficiency Tax Deduction

The 179D Deduction, also known as the Energy-Efficient Commercial Buildings 179D Tax Deduction, is a tax incentive first introduced in 2005 as part of the Energy Policy Act. The program’s intent is to drive commercial building owners and designers of tax-exempt buildings to reduce their energy use by rewarding the implementation of energy-efficient building components – specifically, the HVAC system, interior building lighting, and the building envelope for newly constructed buildings or renovations. In 2020, 179D became a permanent part of the tax code.

Many of the largest commercial buildings in the United States are owned by non-tax-paying entities, such as local municipalities, State and Federal governments, military facilities, K-12 schools, universities, churches, private foundations, non-profits and charitable organizations, etc.,; therefore, they can’t reap the financial benefits of a tax deduction. However, Congress still wanted to incentivize the inclusion of energy-efficient components in these buildings, so they expanded 179D to allow the building owner (government entity) the ability to allocate their deduction to the taxpaying designer of the energy-efficient properties of the buildings.

As a result, Architects, Mechanical Engineers, Electrical Engineers, and other designers of tax-exempt buildings are eligible to receive allocation of the 179D Tax Deductions, which have been recently expanded from up to $5.36/square foot for buildings put in place in 2023 to up to $5.65/square foot for buildings put in place in 2024.

5. Professional Liability and Risk Management

Large firms typically carry substantial professional liability coverage, often with multiple layers of protection and project-specific policies. These premiums represent significant deductible expenses. Additionally, costs associated with risk management programs, including quality control systems, peer review processes, and documentation management systems, typically qualify as deductible business expenses.

The increasing complexity of projects often requires specialized insurance products and risk management approaches. Costs associated with developing and maintaining these programs, including staff training and systems implementation, generally qualify as deductible business expenses. Firms should maintain detailed documentation of these expenses to ensure proper treatment and support potential audit responses.

Strategic Planning is Essential

For architecture and engineering firms, successful tax strategy requires a comprehensive approach that considers both immediate deductions and long-term planning opportunities. The interaction between various provisions of the tax code, particularly Sections 174 and 179, creates opportunities for sophisticated tax planning that can significantly impact firm profitability.

As firms continue to evolve and adapt to changing market conditions, staying current with tax regulations and maintaining robust documentation systems becomes increasingly crucial. Regular review and updates of tax strategy, ideally quarterly, helps ensure optimal utilization of available benefits while maintaining compliance with complex regulatory requirements.

Engaging with tax professionals who understand both the technical requirements of these provisions and the specific operational challenges of large architecture and engineering practices remains essential for maximizing available benefits while managing risk appropriately.