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Construction firms often overlook this tax credit

Many construction firms often don't realize their daily activities qualify them for a significant federal tax incentive—the Research and Development (R&D) Tax Credit, according to www.forbes.com.

Originally enacted in 1981, this dollar-for-dollar tax credit was expanded with IRS rules that were finalized in December 2015. At that time, the main criteria to qualify for the credit—the discovery test—was replaced by a four-part test that no longer required that a company discover something new to its industry to qualify for the credit. Instead, the company only needed to conduct activities within the U.S. that met this new test. And a lot of the technical design within the construction industry met those new requirements.

A company qualifies for the federal R&D tax credit if the company is trying to develop a new or improved product or process in the U.S.—in the construction industry, the technical design is the product; the activity involves the hard sciences, such as engineering; there is some technical uncertainty at the onset with respect to the appropriate design; and there is an evaluation of different alternatives when the design is being developed, such as systematic trial and error, modeling and simulation.

Some typical qualifying R&D credit activities for general contractors include design-build construction, value engineering, BIM modeling, development of means, methods and construction techniques, design for LEED/green initiatives, HVAC or electrical system design, development of installation methods, system detailing for constructability, pipe design and testing, and structural steel detailing.

"The federal R&D tax credit is primarily based on wage allocations, including direct supervision and support of these types of qualifying activities," says National Director and R&D Specialist, David Mayer, CPA. "Contractors, estimators, project managers, superintendents and foremen will typically have wage allocations. The owners/senior management could have wage allocations, as well. Most states also offer an R&D credit, which could double the benefit."

The R&D credit recently has been made a permanent federal tax incentive, and a qualifying company can claim it yearly, providing a significant recurring reduction in its income tax liability. Additionally, the credit now can be used to reduce Alternative Minimum Tax for companies with less than $50 million of gross receipts. There also is an opportunity for certain startup companies to use their R&D credits to reduce a portion of their federal payroll taxes.


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