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KP Unpacked
KP Unpacked explores the biggest ideas in AEC, AI, and innovation—unpacking the trends, technology, discussions, and strategies shaping the built environment and beyond.
KP Unpacked
The $400K Credit You Might Be Missing
Most AEC and manufacturing firms are leaving serious money on the table.
Jordan Wilson, Director of Business Development at Corporate Tax Advisors, joins Jeff to unpack a major tax law change that could put hundreds of thousands back into your business.
From reversing Section 174 amortization to unlocking retroactive R&D credits, this update has big implications for growth, innovation, and M&A.
Whether you run a billion-dollar firm or a bootstrapped startup, you’ll want to hear how to capture these incentives before the window closes.
Need help modeling the impact or prepping filings?
Reach out to Jordan Wilson at Corporate Tax Advisors or call 404-317-4246 for a strategy discussion on how best to approach and claim the credit going forward.
Sounds like you? Join the waitlist at https://kpreddy.co/
Check out one of our Catalyst conversation starters, AEC Needs More High-Agency Thinkers
Hope to see you there!
Hey, welcome back to KP Unpacked. My name is Jeff Eccles. I wear a lot of hats around here, obviously, conducting all of our podcasts, interviews, hosting our in-person and virtual events, and one of the favorite things that I do is I get to talk to people in the innovation ecosystem who are making a difference, people who are innovating, who are helping us figure out how to innovate, and I think today's conversation is going to be a really interesting one, because one question I would have is have you ever felt like you're leaving money on the table when it comes to taxes, innovation, the business operations? I know that for many firms in the AEC industry and maybe the manufacturing sectors, recent tax changes, if you're even aware of them, feel like a real headache. You may be watching the news and wondering how everything that's going on impacts your ability to invest and to grow and to innovate. And what if I told you there's a way, a significant change on the horizon, that could help put some substantial cash back into your business?
Speaker 1:Today, we're going to do a deep dive into critical tax law and things that are happening on Capitol Hill or in Washington, give you some updates that could be a game changer for your bottom line. So stick around because you don't want to miss this. Joining me today to help unravel these complexities and the opportunities of all of this legislation is Jordan Wilson. He's the Director of Business Development at CTA, which is Corporate Tax Advisors. He's a leading expert in strategy for innovative companies and the brilliant mind behind the recent article. You may have read it already Big tax law change for AEC and manufacturing. Jordan, welcome to KPN Pact, I'm glad you're here.
Speaker 2:Thank you, thank you, thank you. Pleasure to be here.
Speaker 1:You and I get to talk every once in a while. We get to see each other in person every once in a while. I always love catching up, you know, both personally and professionally. You've got the I think that's Augusta behind you, isn't it? It is, it is yeah we've talked about this before.
Speaker 1:It is a special place.
Speaker 1:My dad grew up really close to there and so you know, I that painting back there, that photograph back there, all the time and, uh, it brings back good memories.
Speaker 1:But, um, when, when we talk about the business of innovation, if I can say it that way, um, I always appreciate the insights that you bring to the table because I think it's. I always appreciate the insights that you bring to the table because I think it's. I spend a lot of my time with directors of innovation, heads of construction technology. They get really focused on their culture, on their people, on the technology, on their budgets, and I'm not sure if they aren't missing a blind spot, and so I think your insights are always valuable. But before we jump into it, you know, I've said your name, I've given your title, where you're from, but can you set the stage for us and first tell us, you know, give us your background, where you're coming from on this? But what are what? What are the problems or maybe what? What is the blind spot that these R and D heavy firms, um, are facing with some of these new developments that are coming about?
Speaker 2:Sure. So I got into the credits and incentive side of the business 2013-ish in a large firm that focused on both state and federal incentives, and three years ago a little over three years ago I joined Corporate Tax Advisors and in doing so and I guess the best way to put it is the reason why those groups exist. Like you always have the question anytime tax credits, credits come up, so I should. My account handles that 90% of the time they're not. So there's thousands and thousands and thousands of CPA firms across the United States that are great, fantastic firms. I call these credits and incentives more activity based credits and incentives to where there's thousands and thousands of lines of tax code out there that your accountant is managing for your operation, where we focus on 12 to 15 lines of tax code that are specific to activity-based incentives, and so your smaller firms typically do not have an engineer in-house or experts in these very specific opportunities, or call it boutique opportunities, and so, while your big four, your super regionals will typically have somebody in-house.
Speaker 1:But one reason why CTA exists is to be a partner to those CPA firms that don't have the expertise in the house, don't have the bandwidth to go capture these credits and manage their own tax season throughout the year. So go ahead. That seems like an important service for our listeners because while someone's handling payroll, someone's handling all the other I have a complete lack of knowledge when it comes to taxes and things like that. But it seems to me that the normal things you know what you're discussing that are handled by their CPA firms, of course apply, but a real opportunity in the work that they do the activities is the way you said it. So why don't we jump right into? Because R&D tax credits are not all that new, I think.
Speaker 1:Well, you and I have talked about this. We've actually recorded on this before. But you know I'm guessing that some of our listeners have been to the Alphabet Soup conferences maybe an AIA or an ACEC or whatever organization association they belong to to and someone has been there talking about R&D tax credits. They may have heard about them before. Are they actually using them? And then, what's changing? So your article talks about the Big Beautiful Bill in section 174A. So what exactly is this new development? How does it fundamentally change the game for businesses regarding their r&d tax credits? Maybe, maybe, whether they've been taking advantage or not yes, so great point.
Speaker 2:So you're right. R&d credit's been around since 1981, so reagan put it in place and super high level for anybody that's not taking it is. It's an incentive to design, develop and create here in the United States versus overseas it's just that simple.
Speaker 2:Fast forward 40 years. Same concept exists, multiple different changes, but we had a big, big, big change in 2022. And what happened was that in the previous PATH Act there was or the tax cuts and jobs act. Both made changes to where the R&D credit, you would get your credit a dollar for dollar and offset your tax liability and also be able to take all your deductions, minus the 280c election, in that same tax year. Well, what changed in 2022 is I had to start amortizing my R&D cost and expenses over five years. So, while the credit, nothing changed with the credit.
Speaker 2:How we amortize our cost with it did change, and it went from being a very lucrative credit to being the polar opposite of what the R&D credit was built for. It was a hindrance to manufacturing engineering firms because they were losing those very valuable deductions during the tax year and, while credit is always fantastic because it's a below the line item, losing those deductions put a lot of people in a spot where they became much more taxable and it was very much so less lucrative to capture the incentive. And so what just happened, july 4th of this year, is 174A, the HR1 bill, or what we've seen as one big, beautiful bill act. They reversed 174 amortization, which now goes back to the pre-2022 rules, which we are now taking that R&D tax credit in a very lucrative position while also keeping our deductions without amortization, and so what that does it will definitely fuel growth. It's a huge benefit to everyone designing, developing, creating, so all our manufacturers and engineers.
Speaker 2:And there was nothing great about 174, except the fact that you had these massive organizations like AEC, national, your manufacturing alliances that spoke about it and were to get our congressmen and women legislators to get this passed. What happened is that made more firms. Hearing about 174, I've always been surprised that so many people did not know that they can qualify for this incentive. So the one good thing is, if there is one, is that we had a lot of communication about it and that so many more people now know, or at least know, to look for the R&D tax credit now, even more so now that it's more lucrative to capture. But the communication that came with 174 was good in the fact that now more people are a little more knowledgeable about the incentive and whether they can claim it knowledgeable about the incentive and whether they can claim it.
Speaker 1:So you know, speaking of that change in 2022 and the restoration of it in your article you mentioned it was it restores immediate deductions, which I think is. Is this change right? Can you explain the a little bit further the significance of immediate deduction versus capitalization in terms of how these firms can use the credits?
Speaker 2:Typically so pre-2022, I would do my R&D calculation and I would still have my deductions that create it. So what creates this credit is wages, supplies and contractors engaged in design, development, creation, new product, new process. Typically, I would have all my deductions in that current tax year call it 2022. And then the credit was produced. The credit would take care of it, the tax liability, and I would still keep my deductions in that tax year prior to 2022.
Speaker 2:Now, because I have to spread them over those five years, we had clients that were ready to acquire folks and all of a sudden had a $900,000 tax bill and that money went to, rather than a new acquisition or a new investment in innovation, it went to paying a tax bill. And the trouble with that was is that our legislators were saying, oh, this is just a timing issue, it's all going to net out and if you wait six, seven years with little growth, it would have netted out. What they didn't take into fact is that the initial impact of 22, 23 and 24 and how much cash exited the business because of the mechanics on how it was set up, I really don't think really anyone understood how big of an impact it was going to have until we got there.
Speaker 1:Sure, I mean that example that you just used. We know, as we look at the industry, that a lot of growth is driven by M&A, that a lot of growth is driven by M&A and, to your example, if $900,000 goes to the IRS versus into the agreement for M&A, that's a huge barrier to growth there. That's super interesting One of the things, and I think I understood this right maybe it didn't, so correct me where I go wrong but but you talk about retroactive application. Who qualifies for the retroactive, retroactive application of this and what kind of impact could that have? If I'm thinking about this properly, I'm thinking, okay, well it's, it's exactly what it sounds like, so I can now go back and recoup that to years past. Is that what that means?
Speaker 2:So the magic number is 31 million. We're going to treat these in two different buckets. So if you are under $31 million in gross receipts, revenue, you have the ability, no matter how you treated R&D, whether you took R&D and amortized your cost, whether you didn't take R&D, whether you took R&D and ignored 174, if you are under that $31 million number, you have the ability to go back to 2022 and amend 22, 23, and 24. And we're going to fix the 174 amortization. So you no longer have to capitalize and amortize your R&E expenses and you can take the credit in those tax years. You have that ability, can take the credit in those tax years. You have that ability.
Speaker 2:For your groups that are over $31 million we'll call them large employers or larger entities. Those individuals no longer have to abide by 174 going forward. So anything that is on their books from 22, 23, and 24, they can take that amortization and take it in 2025, take it in 2025, 2026, but going forward, they no longer have to amortize. So back to the pre-2020 rules for those folks as well. The big trigger on that $31 million number is go back ability to amend versus going forward and taking your amortized costs in 2025 and 2026. So good news for both groups, great news for the smaller employers under 31 million, but great news as far as a 174 fix for both going forward.
Speaker 1:Yeah, that's super interesting and you know, I think about the ecosystem that we have here around KP, readyco, which you know is definitely a slice of the built community, smaller firms, but also we have startup founders. And you know, because there are startup founders, there are also venture capitalists, private equity people. Does you know, if you are a, as a, for instance, if you are a startup founder, that's that is, maybe you're bootstrapping your startup and going through our startup incubator as a, for instance? Just sort of making something up off the top of my head here. Does this have? I mean, I'm guessing if you're bootstrapping, you're probably below that 31 million threshold. Are you so far below that threshold that none of this matters, or does it still have a significant effect?
Speaker 2:Yes. So startups will put in their own bucket. So if it's bootstrapped again, the R&D credit is based on that. Credit is produced based on W-2 wages, supplies and contractors that are engaged in design, development and creation, development and creation and so anytime there is funds going to or if there's expenses going to those three buckets, that is going to generate a credit.
Speaker 2:Startups are unique and here's why and the fact that there is a rule. So most are not going to be profitable in their first couple of years, if first 10, in some cases, especially some of these software where millions and millions are being invested in wages, development, if it's manufacturing a massive amount of tooling involved capital expenses there. So, whether it's software engineering, development, manufacturing, it's the rules for the startups and this is very unique in the fact that typically you would create prior to 2017, 2016,. You produce a great credit based on those expenses, because the expenses were there but there was no liability. Well, the rules changed and now, if I'm less than five years old and less than 5 million in gross receipts, I can now take that credit against withholding, which is typically the largest expense for these startups. So from there, I'm going to take my credit.
Speaker 2:Let's just say it's a $50,000 tax credit. I'm going to file that on my corporate return. Once that's filed on the return, I am able to take that $50,000 and apply it to my 941, which is your quarterly payroll filing, until it's exhausted. Apply it to my 941, which is your quarterly payroll filing, until it's exhausted. They actually also just increased the cap. It was $250,000. It is up to $500,000. And again, it's typically with these startups, the W-2 payroll wages are the largest expense for most and a quick way to get that cash back into the organization to help fuel future innovation more payroll, more developers and more innovation. So it's very unique and again, the rule there is less than five years old and less than $5 million in gross receipts annually.
Speaker 1:Okay, yeah, that's good to know. So there's obviously a spectrum here. There's obviously a spectrum here, and in the article you outlined four scenarios for firms based on past R&D practices. Can you walk us through some of those scenarios with specific outcomes, specific actions in each type that people should be considering right now as they're moving forward with the new scenario?
Speaker 2:Sure, so I'll start with one, that the XYZ manufacturing never took the credit. Never took the credit. Cpa didn't know about the credit and or we were avoiding the credit because we had heard about 174 amortization. So that group column under $31 million has the ability to go back and amend 22, 23, 24, and or at least go back and evaluate to determine hey, there's $10 worth of credit here or there's $180,000 worth of credit. The unique thing with the look back is that let's just call it $100,000 worth of credit. The unique thing with the look back is that let's just call it $100,000 worth of credit.
Speaker 2:Well, in three years we're looking at $300,000 in incentive and a nice incentive going to happen in 2025. So $400,000 of tax incentives to go against the tax bill.
Speaker 2:So that look back is extremely lucrative for anyone that said hey you know, we talked about R&D a couple of years ago and just didn't feel like moving forward or didn't get good information. Huge opportunity to put cash back into the business again, to fund new innovation, fund new hires, fund a new project. The other one, the other opportunity or example I'll use, is that you were taking R&D before 2022 and continue to take R&D through 2022, and you abided by 174. So you had a big exit of cash flow in 2022, another big exit of cash flow and tax liability in 23 and 24. And tax liability in 23 and 24.
Speaker 2:You have that ability to go back and capture those amortized costs and file as you would have prior to 2022 under these new rules. And all that cash flow should be coming back to the organization and again, that credit is still lucrative, so you're looking to get those amortized costs back. You'd also have the option to let's just say, hey, I've got 40 shareholders, I'm not going back and amending. You also would have the ability to, where you could just take those amortized costs and pull them all into 2025, just like your larger employers would. So, either way, it's a fantastic opportunity to get that tax liability back that we overpaid based on these new rules and then again fund new opportunities with the R&D credit without having the hindrance of amortizing future costs.
Speaker 1:And you mentioned that there's a deadline. Right, You've got to do some of these things. What was by? By 2026?
Speaker 2:yeah, so we call it a statute of limitations. So, uh, the if I file 2022 in march of 2023, three years from that date that statute will close, and so if you are a timely filer, think about it. So now would be a great time to jump in and start looking and evaluating this. Uh, your CPA will thank you too, rather than trying to amend something three years ago at a tax deadline. So it's always great for tax planning to get ahead of that, but you're right.
Speaker 2:So if we want to call it a deadline, your statute will start to expire from your 2022 that you should have filed in 2023, next year, in 2026. From your 2022 that you should have filed in 2023, next year, in 2026. And so know that is that that opportunity will disappear come that three-year timeline. So you do have a little bit of time. If you are an extension, you have a little more time, but if you're a timely filer, then this is something that you want to be having a conversation with a corporate tax advisors and your CPA, and the same phone call to determine an estimate. Is this worth going back? Do we want to look back? Do we want to open up that return? What is the cost of amending? And or is this something where we just shoot 2025 and go forward? So we'll have lots of options and open to talk to anybody and everybody about those options and strategies that come with it.
Speaker 1:Okay, you know we've touched on this a little bit already, I know. But beyond the immediate tax savings which you know, some of these numbers and I know these are made up examples, but some of these numbers that you're talking about are pretty big numbers, pretty big benefit there. But beyond those immediate tax savings, what are some of the broader implications of this law in terms of change, for innovation, job creation and the overall economic health of the AEC world?
Speaker 1:And obviously we touched on this a little bit a minute ago, but when we were talking about growth and M&A, but what are some other broader implications of this?
Speaker 2:The first one that's going to come to mind is that if I have two very similar companies that are competing against each other and one said no, we're not going to look at it, and the other one does, is that the company that's claiming the R and D credit has a headstart for going future.
Speaker 2:And so in the fact that I'm getting six to 10% of my expenses tied towards R and D back in the form of a credit, so therefore I mean immediate impact of cashflow, I'm running more effective and efficiently and I have more capital put back in the business. So I think that's the one because, again, I'm still surprised, even after all of this 174 news, how many people do not realize in manufacturing especially I mean manufacturing is number one claimer of the credit since 1981, that do not realize that they and it's one of those things, hey, this is day-to-day business for us. Well, as the IRS identifies R&D, it also aligns with what you do on a daily basis in some aspects, whether it's a single project or whether it's across the entire organization. And so I think that I am still in shock that there are so few people that believe that they qualify for this, whether it's just bad information or just CPAs not knowing that they could qualify.
Speaker 1:I mean, I think that's a really good point. So what are some of the common misconceptions, or even pitfalls, that some of these firms might encounter when they're trying to navigate this, and how? How do they avoid it?
Speaker 2:Yeah. So the example I always like to share is that when you hear research and development and before I was in this world in business immediately think Petri dishes and lab coats. Sure, the IRS's definition is new or improved business component, product or process, and you have to be able to relate those activities back to a science. And so the example I always use is adaptation we're taking a current technology and using it in a new way, but we're not really developing anything new versus really going through different methodologies to create a new product process, whether it's a widget or whether it's a new item or, again, building. In many cases there's there's multiple methods on how we get there, and so misconception would be that this is our day-to-day routine work, when every project could be different. So you really have to dive into each opportunity and identify those qualified expenses and qualified activities. So I said that the first one would be lab coats and petri dishes the definition of research and development based on the IRS code versus what our minds create, thinking pharmaceuticals and med device.
Speaker 1:Yeah, that makes total sense to me. In my past life in the architectural world, we designed a few R&D labs, right, and that's immediately what comes to mind yeah, oh yeah, lab white coat. You know well, we designed that, but we don't have that in our firm right. There's nobody walking around here in a you know a lab coat. So that that's, that's good. I think that's a really really uh, uh, relatable example there. Um, what, what else? You know, your the the article. In your article you laid it out really really well, and if you're listening to this and you haven't read the article yet, just go over to the KP Ready Co Substack and you can find the article there Again, it's called Big Tax Law Change for AEC Manufacturing and.
Speaker 1:Innovative Companies and you can find that insightsbykpsubstackcom and that'll be linked in the show notes below, as well as Jordan's contact information and anything else you need to know about what we've talked about here. But again, you laid it out really well in the article. I encourage everybody to read the article. So, as we've been talking about this and I like to ask this question I know some guests feel like this is a little bit of a curveball, but I think it's an important question what's one question that I didn't ask that I should have asked? I opened up talking about blind spots. What's one blind spot that I've had in?
Speaker 2:this conversation that we haven't touched on yet. I think people also don't realize. So this has been a federal program again since 1981. There's 32 plus states that have a state R&D tax credit and so something that often gets missed as well living in Atlanta, georgia Georgia's got a fantastic credit. Our neighbors to the east, south Carolina, has a fantastic credit as well, where some states do not. Most states will follow federal guidelines, with some unique changes and also requirements there, but 30 plus states are going to have state R&D tax credit opportunities, whether it's for an application process and or just a statute that we can go claim. I think that's the one thing where, depending on where you are and where the development is happening, where the projects are happening, also where the liability stands, the with that state, opportunities can also come into play outside of that. Think of what else.
Speaker 2:One unique opportunity for especially our architects, is that along with this tax bill came changes to 179D. They are going to sunset, which really you speak of curveball. It was a really big curveball for us as well. There was really no talk of programs. Great programs been around for quite a while. An incentive to design green, so energy efficiency, great for the environment, great for the United States and all of a sudden it was on the chopping block and so, while it is not immediately gone, projects we can continue to claim the 179D deduction up until next year mid -year. Any project started after that will not be able to qualify. So we're still waiting on some guidance there on what starts a project.
Speaker 2:But something very unique that was a curveball to us is that 179D will be phasing out, and unique to the architects and the designer of records what we'll call them is that they can actually claim that deduction for their government work, k-12 work, nonprofit work, with an allocation letter, and so there's an incentive to design above and beyond the standard and by doing so you will be awarded an additional deduction for doing so. But that is one thing that we did see a big curveball in change, especially for our architecture groups and business owners or building owners and developers. You'll see a big change there and maybe a rush to start some projects next year. So it'd be interesting to see if that'll have an impact and we'll be interested to see if our engineering and architecture folks see maybe a bit of a rush for some of these larger developments where that deduction can come in big time to help reduce the cost of a project.
Speaker 1:Well, that's good to know. So there's a. There's a heads up for all of our sustainability leaders out there. If you have been aware and been taking advantage of that particular credit, it's going to be sunset, so that's good to know. Jordan, this has been really informative. It's been good to learn these things. Of course, as I said before, your article is very, very helpful for our listeners, who are feeling maybe a mix of relief and maybe a little bit of overwhelm as well. What's the single most important piece of advice that you'd give them right now? Maybe to get started, if they're not already.
Speaker 2:Ask the question. This is an opportunity when you're. We've talked about this throughout the entire process here. But as far as lookbacks and those credits, they do add up and the rules have changed the requirements for groups like us to produce the form of change. The 6765 has gotten more complex, requires more information, and so we've seen multiple plus changes in the last five, seven years. If you thought you didn't qualify in the past, now's a great time to evaluate, so ask the question, connect with us and then also discuss with your CPA as far as if it makes sense for utilization and connecting on the R&D tax credit. I think asking the question is whether you did before or in the past. I think asking the question of do we qualify and should we reevaluate?
Speaker 1:Yeah, those are good points. So I'll give you more information and you can check the show notes below for Jordan's contact information. But you can reach out to Jordan Wilson, who's the Director of Business Development at Corporate Tax Advisors. And this has been another interesting episode enlightening episode, in fact, of KP Unpacked. Huge thank you to Jordan Wilson for breaking down these vital tax law changes that can empower our listeners and their firms to make informed decisions for their businesses. If you're in the built environment sector, the AEC sector or any innovative industry, take this information to heart. This isn't just about saving money. It's about investing in the future of your company, our economy, obviously and spurring growth and innovation. You can find Jordan's article Big Tax Law Change for AEC and Manufacturing on the KP Ready sub stack. It's called Insights by KP. We'll link all of that info everything that we talked about that needs the link. Just go down to the show notes and you'll find the links there. And, jordan, thank you so much for joining me today and explaining all of this.
Speaker 1:Thank you so much, absolutely, and for all of our listeners out there. We appreciate you listening. Thanks for joining us this week. I'll be back again next week with another guest here on KP Unpacked. Thanks, everybody.