The Future? R&D Deductions for Prefabricated Buildings

A recent New York Times article about a potential prefabricated 34-story building rising in Brooklyn has generated interest in the real estate community.  The article described how developer Bruce Ratner, in an effort to cut costs at his Atlantic Yards project, is pursuing a plan to build the “world’s tallest prefabricated steel structure.”  Building with a prefabricated, or modular, method normally entails connecting modules together to form a larger structure, such as a home.  A module is normally a prefabricated room built offsite in a factory and connected to other modules at the construction site.  For example, Ratner’s proposal would entail 900 modules to form a 34-story building.  Importantly, this method of construction appeals to developers such as Ratner as it cuts construction costs in half and requires less labor.  

While the method has been employed in NYC and urban environments around the globe sporadically, questions remain if such a structure can withstand wind and other forces at such great heights.  From a tax perspective, a prefabricated building of such magnitude also presents some interesting questions.  Primarily, can the costs associated with researching and developing a prefabricated building schematic for “tall” buildings be classified as current year Research and Development (“R&D”) tax deductions? 

According to the IRS, R&D expenditures are reasonable costs incurred in a trade or business for activities “intended to provide information to help eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product.”  The IRS further elaborates with “R & D expenditures generally include all expenditures incident to the development or improvement of a product.” 

If you like more information on the mechanics of the R&D deduction, you may contact Ken Weissenberg by clicking here.   

The NY Times article may accessed here.

Kenneth Weissenberg CPA, Tax Partner in Real Estate Services, is experienced in tax saving strategies and negotiating sales and acquisitions. He represents owners of some of the most well-known real estate properties in New York City.

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