The construction & engineering industry constantly infuses innovation into their different projects. But did you know there is a tax credit that rewards you for that innovation?
While most construction and engineering companies devote their time to do what they do, almost all of them dedicate some time and expense to improve their processes, develop new building techniques, and test new designs. These projects that push boundaries, call for experimentation and involve some financial risk may only consist of 10%-15% of your efforts, but they frequently qualify for research & development (R&D) tax credits.
Unfortunately, these credits are vastly underutilized across the construction industry. Whether you are a general contractor, architectural firm, design-build company, or another business operating in the construction space you may be eligible to take advantage of federal and/or state construction R&D tax credits and considerable tax savings.
What is the R&D tax credit?
Effectively, R&D tax credits reward companies of all sizes and in all industries for their domestic efforts in research, experimentation, and contributions to technological advancements. The credit itself is quite significant, as it provides a dollar-for-dollar tax credit to offset income tax liabilities.
Taxpayers may be able to utilize the R&D credit if their business activities undertaken meet the following criteria:
- Activities are related to the development or improvement of products, processes, or techniques;
- Activities involve the application of principles of the physical or biological sciences, engineering, or computer sciences; and
- Activities involve an evaluation of alternatives used to eliminate technological uncertainties faced during the development process.
Again, the research credit is available to all industries not just those directly involved in life sciences and technology. That means construction & engineering entities can absolutely qualify for the R&D tax credit should their business activities meet the requirements outlined above.
There is no limitation on the credit amount and eligible taxpayers can claim the credit each year. If the R&D credit cannot be used immediately or completely, taxpayers can carry any unused credit forward for up to 20 years. In addition, you can amend previously filed tax returns for up to three to five years in order to claim the R&D credit retrospectively.
New or small businesses may be eligible to apply the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level, with approximately 40 states offering an R&D credit to offset state tax liability.
Find more detailed information on the R&D tax credit, such as the requirements, restrictions, and calculations, here.
What are some examples of qualifying construction R&D activities?
Those in the construction & engineering industry may be eligible for R&D tax credits if they are involved in one or more of the following activities:
- New or improved green building construction development designed to conserve natural resources
- Foundation engineering to abate adverse environmental conditions
- HVAC system design to optimize airflow and energy efficiency
- Electrical system design to optimize power usage
- Plumbing system design to optimize water usage
- Drainage or stormwater management design
- Structural engineering to withstand natural disasters (e.g., earthquake, flood, fire, etc.)
- Experimentation of alternative building materials
- New or improved plant production system design and/or process
- New or improved construction equipment development
- New or improved mechanical equipment sizing
- Design and development of unique temporary systems such as shoring, falsework and dewatering systems
What other considerations do I need to make?
Admittedly, you most likely participate in one or more of the above activities. But when it comes to claiming an R&D tax credit, the details are key. The Internal Revenue Service (IRS) or state taxing authorities will expect an element of trial and error, uncertainty, experimentation, problem-solving or something similar in the projects for which you attempt to claim a credit.
Furthermore, the projects must incorporate an element of risk in order to qualify. An example of risk would be incurring the expenses of any of the above activities without a guarantee of reimbursement. Be aware of costs incurred on out-of-scope work, job margin fades, cost overruns, change orders and the like. Contract language that clearly allows for the contractors’ reimbursement of the above costs or limits its risk will likely not be eligible activities for purposes of the R&D tax credit.
Finally, it is highly important to secure proper contemporaneous documentation to substantiate that the expenditures claimed are eligible for the credit. The taxpayer must also clearly establish full compliance with all of the relevant statutory and regulatory requirements. Adequate documentation includes payroll records, general ledger expense details, project lists, project notes, and other documents produced through the normal course of business.
How can Squar Milner help?
We are in the business of working with you to develop effective tax strategies to maximize your tax savings. If you engage in any of the above activities or others that may qualify, our R&D specialty tax practice can help. We have a team of skilled professionals dedicated exclusively to performing R&D tax credit studies, and they are able to perform an initial credit assessment at no cost to determine if you may be eligible for the research credit and its associated benefits.
Beyond our R&D team, we also foster a Construction & Engineering practice dedicated to the unique challenges and concerns facing the industry. Our construction professionals can collaborate with our R&D experts in order to devise the most effective plan to capitalize on any available research credit.
For example, we can help you set up accounting procedures to more easily capture qualifying R&D costs and make the necessary data readily available at the end of the year. Our team can work with you to simplify the process and remove any unnecessary burden of claiming the R&D credit.
For more detailed information on the R&D tax credit and how Squar Milner can help, please visit here.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
Our Construction & Engineering Services
Our experienced professionals in our construction and engineering industry practice are able and willing to advise you on important issues as we work to gain insight into all aspects of your business. We are here to address your concerns, keep you informed on the latest accounting and tax regulations, as well as tailor best practices to your business.