R&D Tax Credits: A Viable Opportunity That Many Contractors Overlook
As many businesses continue struggling to maintain operations, meet financial obligations, and ensure adequate cash flow during the coronavirus pandemic, it is important to know and understand all the economic incentives that are available to help. One viable, but commonly misunderstood opportunity for economic relief is the Federal Research and Development (R&D) tax credit. And unfortunately, many in the construction industry erroneously believe they do not qualify.
The R&D tax credit is an incentive that rewards companies that continue to innovate and pursue new challenges. Contractors, subcontractors, engineering and construction firms involved in the design, development and construction of innovative buildings and infrastructures have the potential to qualify for this valuable tax incentive that could reduce their federal income tax liabilities.
The tax credit is calculated annually based on the amount of qualified research expenditures (QRE) paid or incurred by a company during the year. Essentially, it allows a credit of up to 10% of eligible expenses. QREs include internal wages paid to employees conducting R&D activities, supplies used in R&D activities and amounts paid to third parties hired to perform R&D activities on behalf of the company. In addition, most states also provide an R&D tax credit to reduce state income taxes.
To qualify, a company must look at its activities on an individual project level and determine if a given project meets a “four-part test.” The test is a combination of four separate qualifiers that a project must meet—Permitted Purpose, Elimination of Uncertainty, Technological in Nature, and Process of Experimentation.
Within the construction industry, there are several possible activities that can be considered, including:
- Developing prototypes and modeling.
- Development of new, improved or more reliable products, processes or techniques.
- Design improvements for LEED or energy-efficient projects.
- Development of a unique assembly or construction methods and processes.
- Experimentation with new building materials.
- Complex systems integration design.
- Developing or improving construction equipment.
- Any project that requires an extra level of testing or certification upon completion.
If your company hasn’t been claiming R&D credits, it’s time to revisit the potential benefits. Credits can be utilized to offset income tax or, if eligible, employer-paid payroll taxes. Additionally, any unused credit can be carried back one year or forward up to 20 years.
Contributing author: Shawn T. Layo, CPA, is a senior tax manager at Dannible & McKee, LLP. Shawn has over 19 years of experience in taxation and planning for individuals and closely-held companies. He is responsible for overseeing tax engagements for a variety of clientele with a focus on construction, retail automotive, manufacturing, multi-state corporations and high net worth individuals.