Tax Planning Strategies and Top Considerations for Architects and Engineers
With constantly evolving tax regulations, architectural and engineering organizations—particularly those operating in numerous jurisdictions—face significant complexities that can drain focus from core business objectives.
Fortunately, taking a proactive approach to tax planning can help address challenges before they become obstacles. Simultaneously, architectural and engineering organizations may also be eligible for tax credits and incentives that can help boost cash flow and alleviate operational expenses.
Explore solutions for top concerns that can interfere with an architectural and engineering firm’s tax planning strategy, as well as opportunities to pursue tax credits to help your better prepare for next tax season.
Top Tax Planning Considerations
Architectural and Engineering organizations may encounter several tax considerations that can impact their financial strategies. Key areas to explore include:
- Internal Revenue Code (IRC) Section 179D tax deduction
- International tax
- State and local tax
- Federal tax
- R&D tax credits
IRC Section 179D
Section 179D, also known as the Energy Efficient Commercial Buildings Deduction, provides architects and engineers with an incentive to incorporate energy-efficient features in their commercial building designs.
For tax years 2022 and prior, Section 179D allows firms designing government buildings to claim a tax deduction of up to $1.80 per square foot—inflation adjusted to $1.88 per square foot for 2022—for work performed on interior lighting, building envelope, and HVAC and hot water systems. For tax year 2025 inflation adjustments, refer to the chart in our article.
The Inflation Reduction Act of 2022 significantly increased the Section 179D deduction, making it particularly beneficial for architects and engineers. These changes apply to qualifying property placed in service after December 31, 2022.
The One Big Beautiful Bill Act of 2025 significantly modified Section 179D by creating a phase-out of the incentive related to the construction start date of a project.
Qualifying for Section 179D as an Architect or Engineer
Architects and engineers who create technical specifications for the installation of energy-efficient commercial building property can qualify as designers under the tax code requirements. Specifically, architects and engineers must create technical specifications related to one or more of the 179D eligible building systems noted in the previous paragraph. If these architects and engineers work on projects for tax exempt entities, the Section 179D deduction associated with the construction project can be allocated to them.
Claiming the Section 179D Deduction as an Architect or Engineer
Architects and engineers can claim the Section 179D deduction by conducting a Section 179D study in the same tax year as when the building is placed in service. If the building was placed in service in a previous tax year, amended tax returns would be required.
A Section 179D Study
A Section 179D study involves a qualified third-party using Department of Energy-approved energy software to model the energy performance of the building and improvements. The energy model is then compared with a reference building that meets relevant energy efficiency requirements, according to standards set by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE).
Changes to Section 179D from the Inflation Reduction Act
The Inflation Reduction Act introduced four main changes to Section 179D. These include increased qualification thresholds, a bonus deduction, expanded deduction allocation to tax-exempt entities, and an alternate deduction path.
Changes to Section 179D from the One Big Beautiful Bill Act (OBBBA)
The OBBBA added a termination date for the Section 179D deduction. The Section 179D deduction can’t be applied to property which begins construction after June 30, 2026.
While this sunset may concern architects and engineers who rely on the deduction, it’s worth noting that Section 179D was originally enacted in 2005 with a two-year expiration. Its termination date has been extended multiple times and was ultimately modified without an expiration date at the end of 2020.
Although the OBBBA reinstated a sunset, the use of start of construction rather than in-service date provides a runway for 179D to still be available, especially for projects with longer construction timelines like newly constructed buildings.
Moving forward, it’s important to monitor any changes to Section 179D, especially considering the long bipartisan history of this incentive in case future Congressional action extends the incentive.
International
For those times where an architect or engineer is working on a project outside the United States, this can generate both challenges and opportunities.
Permanent Establishment Considerations
To the extent that services are taking place outside the US, this could create a taxable presence in that country. This will depend on the tax law in that country, as well as any income tax treaty the US may have with that country. It’ll be important to document what’s occurring with regard to the project as well as the amount of time spent outside the US by the firm’s professionals.
In addition to income tax exposure, provision of services may result in the need to register for, collect, and remit value-added tax in the local country. As each country will have its own rules as to when this is applicable, it’ll be important to make sure this is resolved prior to entering into agreements with clients.
IC-DISC
To the extent that a project is outside the US, an architectural or engineering firm can consider using an IC-DISC to reduce their overall tax liability on the project. There are procedural and documentation requirements, as well as making sure that the structure is in place prior to beginning work on the international project.
State and Local Tax Planning for Architects and Engineers
There are over 12,000 state and local taxing jurisdictions that may impose multiple types of taxes. State taxes can have a significant impact on your bottom line, and failing to comply with state tax laws can result in penalties and fines.
How to Plan for Gross Receipts Taxes
Gross receipts taxes are levied on the gross receipts of a business, without deductions for costs or expenses. Unlike sales taxes, which are charged to consumers at the point of sale on specific goods and services, gross receipts taxes apply to all gross receipts attributable to the taxing state.
States that impose gross receipts taxes include Delaware, Nevada, Ohio, Oregon, and Washington. Additionally, some localities, such as San Francisco and certain municipalities in Pennsylvania, also impose gross receipts taxes.
While architects and engineers are generally not subject to most transaction-level taxes such as sales taxes, they’re often subject to gross receipts taxes which have a broad base and few exceptions or deductions.
Identifying when a service may be subject to gross receipts taxes in advance of starting to do business in a new state may be helpful because it may factor into the business’s pricing or fee structure established for the project.
Furthermore, gross receipts taxes have different sourcing methods which may look at either where the project is located or where the work is performed. Understanding how the tax is applied and how sales are sourced to any given state may be helpful in tax planning and strategy.
Income Tax Considerations for Sourcing Sales
Income tax sales factor sourcing is used by states to determine how much of a business’s income is subject to state income tax. The sales factor is calculated based on the ratio of sales in a state to total sales, but the rules on how to determine sales in a state can vary. Some states use cost of performance, which sources sales based on the location of direct costs associated with a contract, while others use market sourcing, which sources revenue based on where the customer receives the benefit.
Market sourcing is becoming increasingly common, with many states now using this method to source revenue to the location of the project. However, many architects and engineers are still using cost of performance and sourcing all revenue to their physical locations. This approach could lead to exposures in states that use market sourcing and in which the architect or engineer has projects.
Nexus Considerations
Nexus is a legal term that refers to a connection between a taxpayer and a state, and it must be established before a state can legally impose tax. Nexus can be established through physical presence, such as having an office location, remote employees, or traveling to job sites. Nexus can also be established through economic presence, which is generated by revenue from job sites in a state, even if there’s no physical presence.
Understanding nexus is an important consideration for architects and engineers who have jobs in multiple states. Failure to comply with state tax laws can result in penalties and fines. By taking a proactive approach to nexus, architects and engineers can avoid potential exposures and ensure they are following state tax laws. This may include reviewing their business activities in each state, tracking revenue associated with job sites, and understanding the revenue thresholds for economic nexus.
Pass-Through Entity Tax (PTET) Elections
Making a state pass-through entity tax (PTET) election can offer significant benefits for architecture and engineering firms. This election allows eligible entities to circumvent the cap on state and local tax (SALT) deductions imposed on individuals.
By opting for the PTET election, the entity itself pays the tax, enabling a full federal tax deduction of state taxes at the entity level, potentially leading to significant tax savings. Additionally, the PTET election can offer enhanced flexibility in tax planning through intentional timing of the payments. Caution should be exercised, as some states impose strict requirements in timing and manner of PTET elections, and it’s important to work with tax advisors to meet various eligibility rules.
Consumption Based Services
Sales and use taxes are generally imposed on the sale of tangible personal property and certain services. Generally, the only states that impose sales or use taxes on the sale of architectural and engineering services are Hawaii, New Mexico, and South Dakota. For that reason, architects rarely see sales tax applied to their core design services.
While architectural and engineering services are generally not subject to sales taxes, there are a few states that do impose sales tax on most services. Additionally, architects must manage sales and use taxes on purchases of materials, software, and certain subcontracted services.
Understanding the nuances of these taxes is crucial for maintaining compliance and improving project costs. A common issue is that architects and engineers are often either overpaying or underpaying sales or use tax on their digital products are used across multiple states.
For these reasons, establishing a process for the company to manage sales and use tax issues on purchases as part of the accounts payable processing can often reduce risk of over- or under-payment.
Identifying potential sales and use tax obligations early in the project planning phase can also help architects and engineers avoid unexpected costs and ensure proper tax treatment, aiding in accurate budgeting and financial planning.
Income Tax Considerations for Sourcing Sales
Income tax sales factor sourcing is used by states to determine how much of a business’s income is subject to state income tax. The sales factor is calculated based on the ratio of sales in a state to total sales, but the rules on how to determine sales in a state can vary. Some states use cost of performance, which sources sales based on the location of direct costs associated with a contract, while others use market sourcing, which sources revenue based on where the customer receives the benefit.
Market sourcing is becoming increasingly common, with many states now using this method to source revenue to the location of the project. However, many architects and engineers are still using cost of performance and sourcing all revenue to their physical locations. This approach could lead to exposures in states that use market sourcing and in which the architect or engineer has projects.
Nexus Considerations
Nexus is a legal term that refers to a connection between a taxpayer and a state, and it must be established before a state can legally impose tax. Nexus can be established through physical presence, such as having an office location, remote employees, or traveling to job sites. Nexus can also be established through economic presence, which is generated by revenue from job sites in a state, even if there’s no physical presence.
Understanding nexus is an important consideration for architects and engineers who have jobs in multiple states. Failure to comply with state tax laws can result in penalties and fines. By taking a proactive approach to nexus, architects and engineers can avoid potential exposures and ensure they are following state tax laws. This may include reviewing their business activities in each state, tracking revenue associated with job sites, and understanding the revenue thresholds for economic nexus.
Pass-Through Entity Tax (PTET) Elections
Making a state pass-through entity tax (PTET) election can offer significant benefits for architecture and engineering firms. This election allows eligible entities to circumvent the $10,000 cap on state and local tax (SALT) deductions imposed on individuals.
By opting for the PTET election, the entity itself pays the tax, enabling a full federal tax deduction of state taxes at the entity level, potentially leading to significant tax savings. Additionally, the PTET election can offer enhanced flexibility in tax planning through intentional timing of the payments. Caution should be exercised, as some states impose strict requirements in timing and manner of PTET elections, and it’s important to work with tax advisors to meet various eligibility rules.
Consumption Based Services
Sales and use taxes are generally imposed on the sale of tangible personal property and certain services. Generally, the only states that impose sales or use taxes on the sale of architectural and engineering services are Hawaii, New Mexico, and South Dakota. For that reason, architects rarely see sales tax applied to their core design services.
While architectural and engineering services are generally not subject to sales taxes, there are a few states that do impose sales tax on most services. Additionally, architects must manage sales and use taxes on purchases of materials, software, and certain subcontracted services.
Understanding the nuances of these taxes is crucial for maintaining compliance and improving project costs. A common issue is that architects and engineers are often either overpaying or underpaying sales or use tax on their digital products are used across multiple states.
For these reasons, establishing a process for the company to manage sales and use tax issues on purchases as part of the accounts payable processing can often reduce risk of over- or under-payment.
Identifying potential sales and use tax obligations early in the project planning phase can also help architects and engineers avoid unexpected costs and ensure proper tax treatment, aiding in accurate budgeting and financial planning.
Additional Federal Tax Considerations
Factors regarding federal tax for architects and engineers are as follows.
The Cash Method of Accounting
The cash method of accounting can be a strategic tool for professional service firms. This method, characterized by its simplicity, recognizes income only when cash is received and expenses only when they are paid. This provides a real-time snapshot of the firm's cash flow.
Furthermore, the cash method can offer a strategic advantage for taxes. It allows firms to defer income associated with the net receivables, potentially reducing the current year's tax liability. Moreover, it provides the flexibility to manage income and expenses strategically.
The OBBBA’s Impact on Key Provisions of the Tax Cuts and Jobs Act (TCJA)
The OBBBA brings substantial and lasting tax advantages to architecture and engineering (A&E) firms by making permanent several key provisions of the Tax Cuts and Jobs Act (TCJA).
One of the most impactful for A&E firms is the permanent extension of the 20% qualified business income (QBI) deduction for pass-through entities. This ensures that firms structured as S corporations, partnerships, or sole proprietorships can continue to shield a significant portion of their income from taxation, preserving a valuable incentive to remain in or shift to pass-through structures.
Also, by locking in the post-TCJA individual tax brackets, the law helps firm owners avoid the higher tax rates that were scheduled to return in 2026. The TCJA also introduced lower corporate tax rates, which are continuing under the current law.
Another major benefit under OBBBA is the reinstatement and permanent extension of 100% bonus depreciation. This allows firms to fully expense qualifying purchases of equipment, software, and other tangible property in the year they are placed in service—rather than depreciating them over time. For A&E firms that often invest heavily in technology and other capital assets, this change significantly improves cash flow and reduces taxable income in years with major investments. Combined, these provisions enhance both the operational flexibility and long-term planning capacity of firms across the industry.
For firms involved in innovation, the return of immediate expensing for domestic research and experimentation costs is another major benefit. This provision allows architecture and engineering firms to deduct research and development (R&D) expenses incurred in 2025 without spreading the deduction over several years. For firms investing in new design technologies, sustainable building methods, or advanced modeling systems, this offers a significant tax incentive. These advantages also make firms more attractive targets for mergers and acquisitions, especially in the mid-market, where tax efficiency can influence deal structure and valuation. More discussion on this provisions can be found below.
R&D Tax Credits
Both federal and state R&D tax credits offer architects and engineering firms incentives to invest in R&D activities when taking on innovative or green sustainable projects. This can help create long-term tax savings and increase the firm’s cash flow to promote reinvestment and additional growth opportunities.
How Architectural and Engineering Firms Can Use R&D Tax Credits
Architectural and engineering firms can utilize R&D tax credits by claiming eligible activities, such as developing new building materials or techniques or creating innovative design solutions to improve energy efficiency. This can significantly reduce their tax burden and free up capital for further R&D in sustainable or efficient building technologies and solutions.
The definition of R&D activities are wide ranging and can relate to many innovative activities. By claiming these credits, firms can reduce their long-term tax burdens and free up capital to invest in more challenging design projects.
How R&D Tax Credits Can Be Affected on a State Level
State-level policies can significantly impact how R&D tax credits function for businesses. Here's a breakdown of two key influences:
Credit Rates and Eligibility
Each state sets its own credit rate, which is a percentage of qualified R&D expenses that a company can deduct from their state taxes. Additionally, some states may have stricter or looser eligibility requirements compared to the federal guidelines for qualifying activities. This variation can make a big difference in total tax savings.
Stacking with Federal Credits
Companies can often stack state R&D tax credits on top of the federal credit, offering a more substantial tax benefit.
Impact of OBBBA on R&D Expenses
The OBBBA creates a significant tax opportunity for engineering and architecture firms involved in domestic research and development activities. Under the new rules, taxpayers may elect to deduct any remaining unamortized domestic research and experimental (R&E) expenses incurred in taxable years beginning after December 31, 2021, and before January 1, 2025. This allows firms to accelerate deductions over one or two tax years starting in 2025, unlocking immediate cash-flow benefits from costs previously spread over multiple years.
International R&D expenses—such as overseas design activities or cross-border design collaborations—remain subject to the 15-year amortization requirement.
Moving forward, firms can choose to expense domestic R&D in the year incurred, enabling faster tax savings, or to capitalize and amortize over at least 60 months to better match project timelines. This added flexibility allows engineering and architecture companies to align their tax strategy with business cycles while still leveraging complementary incentives like the R&D tax credit.
We’re Here to Help
To learn more about solutions for the top tax issues for architects and engineers, contact your Moss Adams professional.