Does Your Construction Company Qualify for the Research and Development Credit?
- Dec 1, 2022
The research and development (R&D) tax credit is one of the most lucrative credits the Internal Revenue Code provides, but it’s commonly overlooked. The definition of “research and development” is more expansive than one might think and may include activities your construction company already performs on a daily basis.
What is the research and development tax credit?
R&D tax credits are government-sponsored tax incentives that reward businesses for conducting research and development in the United States. The 2015 PATH Act permanently extended and expanded the provisions of the R&D tax credit, making it even more valuable. Yet the R&D tax incentive is woefully underused by small and medium-sized businesses. Many business owners who don’t perform traditional research functions don’t believe the credit applies to them, or that the cost of a tax specialist might outweigh the benefits.
How are research and development activities defined?
The R&D tax credit isn’t just for companies inventing new products. Businesses making improvements to processes, products, patents, techniques, formulas and software applications can also benefit from the R&D tax incentive.
The IRS has a four-part test to determine qualifying research activities:
- Qualified purpose. The activity must be undertaken with the purpose of developing or enhancing a product or process’ quality, functionality, reliability, cost-efficiency or performance.
- Technical in nature. The process of experimentation must rely on hard sciences such as physics, engineering, biology, chemistry or computer science.
- Technical uncertainty. The activity must be performed to eliminate a technical uncertainty about the improvement or development of a process or product, which includes computer software, formulas, techniques and inventions.
- Process of experimentation. The activities must include a process of experimentation taken to resolve or eliminate a technical uncertainty. This includes evaluating alternative approaches or solutions through simulation, modeling, systematic trial and error, or other methods.
What activities might fall under R&D for construction companies?
If your organization pays employees to develop new or improved products, processes, techniques, inventions, formulas, or software, then you may be eligible. If you are financing activities to try to develop or improve any of the following, you may be eligible for R&D tax credits:
- Energy efficiency
- LEED qualification
- Structural systems
- Construction equipment
- Mechanical systems
- Building materials and their combinations and uses
- Electrical and lighting systems
- Integration and constructability of building components
- Water systems
- Sanitary systems, including waste and wastewater treatment and disposal
- Plant performance or capacity
- Reclamation and remediation techniques
- Process design
- Structural boring techniques to allow construction in sensitive conditions
- Pilot plants
- Temporary structures used in the construction process
- Construction techniques
- Low-carbon technologies
- Flashing details
- Environmentally sustainable solutions
In addition, if you’re at risk for the financing attempts to develop or improve construction and construction-related components like those above by any of the following, you also are likely to be performing qualified activities:
- Project architects
- Design services advisors
- Electrical designers
- Mechanical designers
- HVAC fabricators
- Lean and Kaizen specialists
- Material scientists
You don’t have to be trying to revolutionize the industry to qualify for the R&D credit, and your efforts don’t have to succeed. Attempts to develop incremental, evolutionary product and process improvements are eligible as well.
In This Issue
- Does Your Construction Company Qualify for the Research and Development Credit?
- Inflation Reduction Act: Tax Provisions for Business Owners
- Clean Energy Tax Credits in the Inflation Reduction Act
- Inflation Reduction Act Updates to the IRC Sec. 45L Tax Credit
- Contract Assets and Liabilities Within the Scope of ASC Topic 606 for the Construction Industry
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Donald N. Hoffman
Donald Hoffman is Partner-in-Charge of the firm's Maryland office. His expertise includes accounting, tax planning, business consulting, strategic planning, business succession, buy/sell agreements, and estate planning.
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