You may already have qualified for a federal research and development (R&D) tax credit in the eyes of the IRS, but do not know it, since this tends to be an underutilized and misunderstood opportunity among builders. About 30 states have their own versions of the federal tax benefit, which, when leveraged, could also result in state level savings.
Experimenting on The Job?
The word “innovation” tends to conjure images of scientists in lab coats, but the purpose of the R&D tax credit is to support regular businesses with the day to day costs of experimenting on the job—and that’s something plenty of contractors do quite frequently, sometimes out of necessity, given shifts in the availability of supplies and workers, tight timeframes and unexpected site conditions. For the purpose of the R&D tax credit:
The IRS…defines research as the development and improvement of processes, techniques, formula and software … .More than 30 states have similar versions that also offset state-level taxes. Given the…broad definition of R&D, a wide range of construction research activities could help your business qualify. This is especially true if your firm takes on engineering, design and/or design/build work as part of your projects. Some possibilities include:
- Designing new structures, like “green” buildings, to improve energy efficiency.
- Experimenting with new construction processes or techniques to see if they can save time, energy or costs.
- Evaluating new, novel materials or structural designs to complete a project.
- Making technique enhancements to tackle a new challenge, like improving piling systems to deal with unique types of geology.
- Creating innovative electrical or HVAC systems for buildings.
Dollar for Dollar Tax Bill Reduction
Accountants remind us that the R&D credit, which can be carried “for up to 20 years,” is often worth pursuing because it is a “dollar-for-dollar reduction of your tax bill on top of the deductions you already receive for business expenses.” For example, expenses that can be claimed include:
- Salaries you are paying employees working on engineering, design, and/or design/build projects.
- Cost of raw materials and supplies used during their prototype research.
- Payments made to third- party contractors for helping with your construction R&D, like engineering contractors or research institutions.
A common misconception about the R&D tax credit is that innovation must have industry-wide implications, but to the contrary: “The innovation only needs to be new for your company, not the entire industry … .The IRS also rewards investment in R&D, not the result. So you could qualify for research spending even if it does not lead to a successful breakthrough.” You can assess your eligibility for claiming R&D expenses using the IRS’ four-part test.
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