When does payment from a client disqualify an architectural firm from claiming research tax credits? Do fixed-price contracts for architectural services create “funded research” that makes the firm ineligible for these credits? The Tax Court case Populous Holdings, Inc. v. Commissioner of Internal Revenue, 2019 WL 13032526 (U.S. Tax Ct. Dec. 6, 2019), provides an opportunity to examine this issue for architectural firms and other design professionals. Facts & Procedural History Populous Holdings, Inc. is an architectural design firm that provides services under fixed-price contracts. For tax years 2010 and 2011, Populous claimed research tax credits under Section 41 relating…
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The Process of Experimentation Test: Why Many Research Tax Credit Claims Fail
Many businesses engage in activities they believe qualify for the research tax credit under Section 41 of the tax code. They conduct tests, develop products, and innovate processes, but still find their credit claims denied by the IRS. Why? Often, the answer lies in the “process of experimentation” test—a requirement that trips up even companies genuinely engaged in research and development. The disconnect typically occurs between what businesses consider research and what the tax code defines as qualified research. Simply conducting tests or developing new products isn’t enough. The tax law requires a structured, methodical scientific approach that many businesses…
When Can Contractors Claim Section 179D Energy Efficiency Deductions?
As electrical contractors work to improve energy efficiency in commercial buildings, they often find themselves in a position to potentially claim valuable tax deductions. These contractors install sophisticated lighting systems and may believe they qualify for substantial tax benefits under Section 179D of the Internal Revenue Code. However, misunderstanding the timing requirements or the criteria for being “primarily responsible for design” can lead to denied deductions and disputes with the IRS. When exactly is energy-efficient property considered “placed in service” for tax purposes? What does it mean for a contractor to be “primarily responsible” for designing energy-efficient systems in government…
When Is Government-Contracted Research “Funded” for Tax Credit Purposes?
Many government contractors engage in sophisticated research and development activities that push the boundaries of science and technology. These contractors rightfully wonder whether they can claim valuable research tax credits for this work. The answer hinges on a critical question: Is the research considered “funded” by the government under the tax code? If it is, those expenses don’t qualify for the research tax credit, potentially leaving millions of dollars in tax savings unclaimed. A recent Court of Federal Claims case, Dynetics, Inc. and Subsidiaries v. United States, 121 Fed.Cl. 492, provides an opportunity to consider when government contractors can claim…
