Should your firm’s tax returns be on a cash or accrual basis? At what revenue level should you incorporate? What incentives and pitfalls should you be aware of if you’re working domestically versus on international projects? Whatever your situation, this guide will help you plan ahead.

What's a good U.S. "tax calendar" for an architect to follow? What basic tax preparation goals should be met by what dates?

It depends on what type of entity the firm is operating under. Many – if not most – architects, designers and engineers are S-corporations, and have a December year-end.

Very few have a fiscal year-end, which is typically a Sept-Oct-Nov year end. There is additional work that needs to be done for a fiscal year-end entity. The majority of my clients are December year ends, and that’s what the IRS prefers. Professional service companies — which includes architects, engineers, accountants, attorneys, I start discussing incorporation when revenue reaches $50,000 to $70,000.health care providers, consultants, actuarial science and performing arts — are required by the IRS to have December year ends. If they don’t, there is additional paperwork that must be filed. For a December year end, if you’re not incorporated, you just file your individual return, with an April 15th filing deadline.

If you have a corporation with a December year end, the returns are due March 15th. To enable your accountant to prepare your return with enough time, information needs to be submitted by mid-February.

How do you recommend sole proprietors, small (10 people or less) and mid-size (50+ people) architectural firms classify themselves: as an LLC, PLLC, S-Corp or PC?

It's not really the size of the firm that determines the entity type. I have some very small sole proprietors that are making large sums of money. The decision has to do with revenue level, who the owners are, and how much risk the business will have. In the field of architects and engineers, I see those fields as facing more risk than if they were, say, an artist. I like to have my architects incorporated, either as an LLC or as an Inc or PC corporation because it gives them more legal protection.

What’s the revenue level you recommend for incorporation?

I start discussing incorporation when revenue reaches $50,000 to $70,000. I think that people should incorporate right away when they start a business, but if they come to me as a self-employed individual, there can be some very smart tax planning strategies done as a corporation.

For small firm/sole practitioners, how much of their fee should they set aside for taxes? Is there an easy/recommended way to do this?

A very rough estimate of the amount to set aside for taxes is 40% of net income. But it varies. Here in Massachusetts, our taxes are much lower than California. You have pretty high taxes in California. An architect's financial statements are kept on the accrual basis, but their tax returns should be on the cash basis. Your overall tax liability depends on the state you are located in and your effective federal tax rate.

As a general rule I use the 40% tax rate if a client is self-employed, because they have to contribute to their own Social Security. If you are an employee, you pay 7.65% and the employer matches it. When you are self-employed, you have to pay the whole 15% yourself.

The 40% tax rate is made up of 15% for self-employment tax, 28% for federal taxes, and here in Massachusetts, we add the 5% state income tax. The IRS has graduated tax rates, so someone would need to calculate their effective tax rate to determine what to put aside for taxes.

It’s better to estimate too high vs. too low, so that you are not surprised with a huge tax bill in April.

When self employed individuals are just starting out and not making very much money, setting aside 40% can be very hard to do.

What insight would you give an individual who is considering being an 'independent contractor' for a firm?

First, a business considering hiring an independent contractor should look very closely at the “employee vs. contractor” regulations of the IRS and in their state. The IRS has 20 points to determine if someone should be classified as a freelancer, or independent consultant, versus an employee. Misclassifying a worker can result in serious financial penalties.

In Massachusetts the rules are even more strict. Here, if you hire an individual to do a task that is in your line of business, you must pay them as an employee. That means an architectural firm hiring a freelance architect must pay them as an employee, including payroll taxes, Social Security, etc.

If someone is working as a freelancer, they should think of themselves as self-employed. They need to keep track of their expenses, right down to the mileage to and from the client that has hired them. They need to keep track of out of pocket expenses, such as parking, business meals and entertainment, professional dues, and their own professional insurance. All of those items are deductible. They need to establish a good bookkeeping system, and pay quarterly estimated taxes.

What should an architect or architecture firm look for in a CPA? What services should the CPA offer, and how involved should they be in setting up day-to-day accounting practices?

You certainly want someone who understands your industry, knows the processes and internal workings, and common practices of revenue generation and recognition. There are some specific and unique practices in this field.

So it pays to look for someone with experience in the Architecture, Engineering and Design industry. Someone looking for a new CPA firm should do an online search or ask other architects who they use.

When you start putting feet down on foreign soil and opening offices is when it can get costly for the firm.A good CPA will serve as a trusted advisor. I get questions all the time from clients such as, “What are your other architects paying their draftspeople? What are the owners paying themselves? What are the owners billing rates?” I can easily provide them with this (and other) benchmarking information that helps them run their businesses profitably.

Another reason to engage a CPA firm who understands the industry is because an architect’s financial statements are kept on the accrual basis, but their tax returns should be on the cash basis.* Often, I have been hired by a new client whose prior accountant put them on an accrual basis on their tax return and they have paid more tax than necessary. Architectural firms are one of the industries that the IRS allows to be on the cash basis on their tax return, so it is important that the CPA understands about personal service corporations and specifically about their industry.

How involved should an accountant be in the day-to-day operations of a firm?

It depends on the size of the firm, and on what the owner feels is important. We have staff accountants in our firm who go out to clients’ offices on a daily, weekly, or monthly basis to perform routine bookkeeping services. Our regular contact with the clients might be through these visits. But I also touch base with clients frequently. I am called on for advice on things such as referrals for other service providers, with questions about giving someone a raise, about changing health insurance benefits, etc. Senior staff or supervisors and managers are called on for all types of questions related to running the business, not just accounting and taxes!

One of our forum commenters wrote to us that they heard on NPR that part of the new corporate tax-cut legislation reclassifies architects as "manufacturers" and allows them to write off the first 9% of profits as untaxed income. Would you recommend architects take advantage of this reclassification?

It is called the domestic production activity deduction, or DPAD, and it is not new, but has been around for many years. The original intent of the legislation was to benefit manufacturers who kept production in the U.S. instead of sending it offshore. It is an incentive to manufacturers: if you leave the country for manufacturing, you don’t get the deduction. Architects, engineers, and some designers fall under the manufacturing classification because construction is considered manufacturing. They automatically fall under the manufacturing classification. It’s not something you have to elect.

Please bear in mind, the deduction is not a flat 9% of income. The formula is: 9% of the lower of 50% of your wages, or your net income. A sole proprietor, with no employees and no wages, doesn’t qualify for the deduction. A partnership with no employees doesn’t qualify either because they pay no wages.

You work with international taxes. Let’s say you are an architect, and 50% of your work is domestic and you’re doing a project in London that’s another 50%. How complicated is that, tax-wise?

If the firm sets up an office out of the country, that makes the tax returns more complicated. There will probably be tax filings in the other country. If all of the design work is being done in the U.S. and no foreign office has been set up, then the DPAD deduction is reduced. But it doesn’t really change the complexity of the tax return.

The tax filings get difficult when businesses have to file tax returns in foreign countries. Most of my architectural firm clients are not opening offices in other countries. When you start putting feet down on foreign soil and opening offices is when it can get costly for the firm.

When is the best time for an architect who currently does not have an accountant to start contacting CPAs for tax season?

The earlier the better! Most of our new clients come to us in the last quarter of the year (October, November and December) however, we receive calls all year round from architects who require additional services, business advice and/or a higher level of attention that they are not getting from their current firm.

* For a thorough explanation of what accrual vs. cash basis means, please visit the IRS website:

Accrual: https://www.irs.gov/publications/p334/ch02.html#en_US_2014_publink1000313254

Cash: https://www.irs.gov/publications/p334/ch02.html#en_US_2014_publink1000313238