This article was updated January 19, 2021.
The construction industry is no stranger to innovation. Projects that push boundaries can frequently qualify for R&D tax credits, but it is important that the qualified activities and expenses are correctly identified and properly documented to support the credit.
But first, what is the R&D tax credit?
The R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years. In addition, previously filed tax returns can typically be amended for up to three years in order to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.
New companies may be able to benefit from the payroll tax offsets designated for qualified small businesses. Companies that have gross receipts for five years or less and less than $5 million in gross receipts may be eligible to apply up to $250,000 of the R&D tax credit against their payroll taxes.
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.
Here are some of the most common client questions we encounter on this topic.
How much can a company save with R&D tax credits?
Depending on client size and the types of activities performed, our construction clients have saved anywhere from $50,000 to $5 million through R&D tax credits. The amount saved is based on the amount of expenses that are determined to be eligible for the credit, not the revenue generated by a company. Generally, we find the amount of credit to be approximately 5%–10% of a company’s R&D expenses during a given year.
What does the credit apply to?
Innovation is key when it comes to R&D. Companies that take on technically challenging projects that require the design and development of new structures, building components, or various supporting systems often have expenses eligible for the credit.
What activities qualify?
Construction companies that are spending time, money, and resources developing new or improved products or processes could be eligible. Companies that take on design and engineering responsibilities, or are constructing something they haven’t attempted previously, often have qualified activities.
Here are some examples of construction activities that could qualify:
- Development of innovative electrical, HVAC, and energy-efficient systems
- Design and development of innovative buildings, structures, and related components
- Design and development of unique temporary systems such as shoring, formwork, falsework, power, and dewatering systems
- Development of new or improved processes, methods, and techniques used in the construction process
To apply for these credits, what’s the next step?
The first step is to have an analysis performed on the types of projects your company is working on in order to identify eligible activities. The key is to find someone who understands the construction industry, as well as the rules surrounding the R&D tax credit and can help identify qualified activities and quantify eligible expenses.
A key component to claiming the credit is identifying and collecting documentation that supports the credit. These can include designs, test reports, evaluations, and communications that detail the analysis that took place in order to overcome challenges and develop solutions to successfully complete the project.
While companies are often tempted to calculate credits on their own, there’s a considerable amount of knowledge required to identify and collect the correct information. Claiming credits incorrectly can result in the loss of credit and possibly penalties from the IRS.
We’re Here to Help
With recent increased IRS scrutiny around R&D credits, it’s crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about R&D Tax Credits—and if Your Company Qualifies, or request a complimentary credit benefit estimate to see how much your company could save.