What expense category is Architectural and Engineering Fees?

When a business undertakes a construction project—whether it's a new building, an addition, or a major renovation—the fees paid to architects and engineers for plans, blueprints, and design services are a significant and essential cost.

However, these professional fees are not a regular operating expense that can be deducted in the current year. The IRS views these costs as being intrinsically linked to the creation of a long-term asset. This guide will clarify how to correctly categorize architectural and engineering fees according to IRS rules to ensure your business remains compliant.

Architectural and Engineering Fees Category

The fees you pay for architectural and engineering services for a construction project are a capital expenditure.

IRS Publication 535 and Publication 946 are clear that costs to acquire or produce a tangible asset, including a building, must be capitalized. The fees for designing that asset are considered a direct cost of producing the property and must be added to its basis.

Important Considerations While Classifying Architectural and Engineering Fees

The most critical factor is that these fees are part of the cost of the asset itself and must be treated accordingly.

Fees Are Added to the Basis of the Property

You cannot deduct architectural and engineering fees as a current expense. Instead, you must add these costs to the basis of the building or improvement being constructed. For example, if you pay $500,000 to construct a new building and paid an architect $50,000 for the plans, your total capitalized cost (basis) for the building is $550,000.

Recovery Through Depreciation

Once capitalized, you recover the cost of these fees, along with the rest of the building's cost, through annual depreciation deductions. The building and its associated design fees are depreciated as a single asset over the appropriate MACRS recovery period (e.g., 39 years for a nonresidential real property).

What If a Project Is Abandoned?

If you pay for architectural plans but then abandon the project before construction begins, the fees are generally a deductible loss in the year you abandon the project.

Tax Implications and Recordkeeping

The tax treatment for these fees requires capitalization and depreciation, not a standard expense deduction.

How to Report the Costs

You do not report architectural and engineering fees directly as an expense. Instead:

1. Capitalize the Cost: The fees are added to the basis of the property on your balance sheet.
2. Calculate Annual Depreciation: Each year, you calculate the depreciation deduction for the entire property (including the capitalized fees) on Form 4562.
3. Report the Deduction: The total annual depreciation deduction from Form 4562 is then carried to your main business tax return (e.g., Schedule C, Line 13).

What Records to Keep

You must maintain meticulous records to substantiate all project costs. This includes:

• The signed contract or service agreement with the architectural or engineering firm.
• All blueprints, plans, and project documents.
• Invoices from the firms detailing the services provided.
• Proof of payment for all fees.

How Fyle Can Automate Expense Tracking for Project Fees

Fyle helps you capture and organize all the professional fees and other costs associated with a construction project, providing a clean record for your accountant to handle capitalization and depreciation correctly.

• Centralize Professional Invoices: Forward and attach your architectural and engineering firms email their invoices to Fyle for automatic capture.
• Track by Construction Project: Code all design fees, contractor payments, and material costs to a single project for precise cost tracking.
• Create a Clear Audit Trail: Fyle keeps the contracts, blueprints, and invoices together in one easily accessible digital record.
• Automate Your Accounting: Sync capitalized project costs to the correct fixed asset account in QuickBooks, Xero, NetSuite, or Sage Intacct.