This seminar was presented for the American Institute of Architects' Potomac Valley Chapter. It covers tax planning strategies, management accountability issues, and succession planning for architectural firms.

1. Tax, Management & Succession Planning
Thoughts for Architectural Firms
David Goldner, CPA, CVA, CFP

2. David Goldner – background
• CPA (1980)
• Master’s in taxation (1983)
• CFP (Certified Financial Planner 1989)
• CVA (Certified Valuation Analyst 1994)
• Managing partner (90 person CPA firm)

3. Taxes – §179D deduction
• Energy Policy Act of 2005 –
179D introduced
– Section 179 allows the
expensing of property
• EPAct 2008 update –
enhanced usability of
deduction for architects and
engineers

4. Taxes – §179D deduction
• When you reduce total energy and power costs by 50% or
more compared to a reference building – qualifies for a
tax deduction of up to $1.80/SF
• Modeling is required to compute the deduction under
ASHRAE 90.1-2001 baseline = $1.80
Lighting HVAC
Building
envelope

5. Taxes – §179D deduction
• Generally the property owner gets the deduction
• Special rule for public property
– If the building is owned by a municipality or
government organization, they can assign the
tax deduction to you, the architect or
engineer (boo)

6. Taxes – §179D deduction
• Eligible properties – projects completed in the
last three years
– New construction
– Remodels / retrofits
– Additions
– Property placed in service between 2006-2013
– 30,000 SF or more

7. Taxes – §179 deduction
• Eligible properties
– Municipal or government-owned
• Courthouses
• HUD housing (4 stories or more)
• Airports, museums, libraries
• Transportation centers
• County-owned hospitals
• Convention centers
– Schools
• K-12 and higher education

8. Taxes – §179D deduction
• Case study – high school
– Qualifying area: 485,830 SF
– Qualifying system: lighting,
HVAC, envelope
– Deduction / SF: $1.80
– Total 179D deduction:
$874,494

9. Taxes – §179D deduction
• Case study – museum
– Qualifying area: 80,377 SF
– Qualifying system: interim
lighting
– Deduction / SF: $0.43
– Total 179D deduction:
$34,562

10. IRS requirements
• Third-party certification report
– Unrelated PE or contractor
– Relevant reduction
requirements statement
– Field inspections statement
– DOE-approved software
– Perjury statement

11. IRS requirements
• Obtain signed allocation letter from
government owner; it must include:
• Designer
• Owner of building
• Cost of property
• Date placed in service
• Amount of the deduction allocated to
designer
• Penalties of perjury declaration
(see sample allocation letter)

12. Taxes – §179D deduction
• IRS requirements – third-party certification report
– Performed by unrelated PE or contractor
– Relevant reduction requirements statement
– Field inspections must be performed after property
placed in service
– DOE-approved software
– Perjury statement

13. Taxes – §179D deduction
• Tax wise – accounting procedures and tax filings
– Taken as “other deduction”
– Firm structure dictates how deduction is used (S-corp,
C-corp, etc.)
– Reduced benefit, carry forward or back options available
– Tax planning opportunity with your CPA
– Amend past three years’ tax returns
– Allocation letter and certification report should be kept on
file and a copy sent to your CPA; this does not need to be
submitted with amended return

14. Taxes – §179D deduction
How the deduction works

15. Taxes – §179D deduction
§179D process overview

16. Tax Armageddon – the issues
• Ordinary tax rates are rising
• Capital gains and dividend tax rates increasing
• Estate taxes
• Alternative Minimum Tax hits BIG
• Two percent payroll cut will end
• Tax credits will be slashed
• New high earner “excise tax” on passive income

17. Tax Armageddon – planning
• 50% bonus depreciation is in its last year
• Credits still available for many types of new hires
• Estate tax planning – once in a lifetime planning
opportunity for very wealthy
• Plan to recognize capital gains in 2012
• Maximize your ordinary income in 2012

18. Management
Accountability is King
implement accountability to
improve performance

19. Management – accountability
• Starts at the top – partner accountability
– Do you have a formal system in place?
– Remove artificial harmony in your group!
– Develop a non-negotiable firm commitment statement
– Establish a partner goal setting process
– Tie partner goals to compensation

20. Management – accountability
• Successful partner accountability plans:
– Have SMART goals – specific, measureable,
attainable, realistic and timely goals
– Are simple and understood by all partners
– Reward results, not efforts
– Incent partners to work in areas of strength
– Require clear communication and understanding of
results by each partner
– Align partner goals to the firm’s strategic initiatives

21. Management – accountability goals
• New business won – specific reward of a
percent of new business as collected
• Success growing a niche area – reputation of
the firm, speaking engagements, awards won
• Development and management of staff –
increased efficiency

22. Management – accountability goals
• Leader in technological innovation – what gets
implemented
• Individual working goals – hours worked,
business managed and realization goals
achieved
• 60-70% of comp fixed – 30-40% reward based

23. Succession planning – valuation
• Valuing an architectural firm
– Net asset value (no goodwill)
• Cash A/R WIP equipment less debt
– Earnings based methods
• Weighted average earnings
• Excess earnings
• Discounted future earnings (Can this be estimated? )
– Market value
• Discretionary earnings
• EBITDA

24. Succession planning – valuation
• Cash basis financial statements
• Receivables and work in progress
• Restrictive agreements among partners
employees grievance actions
• Depth or leadership
• Can you survive to the next generation?

25. Succession planning
• Personal goodwill
– Business carries name of individual
– Name recognition of individual
– Referrals to individual
– Closeness of contact
– Importance of personal service

26. Succession planning
• Institutional goodwill
– Overall practice reputation
– Effective workforce in place
– Practice-wide marketing
– Referrals to practice rather than individual
– Repeating as opposed to one-time revenue stream
– Practice owns intellectual property

27. Succession planning
• Architectural practices tend to sell in the range of
1.75 to 3 times discretionary earnings,
converting to an estimate of 50% of gross
revenue (per David DeJong)
• BV market data reports – 13 sales (median)
– Revenue – 1,240,000
– 55% of revenue
– 1.8 x discretionary earnings

28. Questions?
David Goldner, CPA, CFP, CVA
dgoldner@gma-cpa.com
410.685.5512
www.gma-cpa.com

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