Many companies have long been aware of the research and development (R&D) tax credits that exist within the Internal Revenue Code (IRC). However, the R&D credit remains one of the most misunderstood and underutilized tax credits available today. Traditional misconceptions are that only the largest U.S. companies can benefit from these credits, or that only “high-tech” industries who conduct their operations in a laboratory or testing facility would qualify.
The reality is that many industries, including the construction industry, conduct activities every day that could qualify them to claim the benefits of the R&D credit. Some of the best candidates include architectural and engineering firms, mechanical and electrical contractors, and even general contractors.
It’s important to know that R&D does not just apply to inventions, but rather encompasses the design, development or improvement of products, processes, techniques, formulas or software. A broad range of common construction industry practices will qualify for the credit under the IRC’s definition of R&D.
Construction industry architects, engineers, designers and machinists often spend a substantial portion of their time developing new and innovative designs and processes in an effort to remain competitive. This continuous advancement of technologies provides plenty of opportunities for construction companies to take advantage of these tax incentives.
Examples of construction activities and innovations eligible for R&D tax incentives include:
- Means/methods and construction techniques
- Structure and facility design for constructability
- Construction equipment development and improvement
- Design for LEED/green initiatives
- Energy efficiency design or improvements
- HVAC, electrical, plumbing and lighting systems design
- Building information modeling (BIM) for sub-system coordination
- Design functions directed at improving performance, reliability, quality, safety, and costs
- Mechanical equipment sizing and high-tech equipment installation
- Unique infrastructure design
The R&D credit has been renewed and extended many times over the years. The current extension of the credit expired at the end of 2014, but proposed bipartisan legislation is fully expected to renew the credit for 2015. Legislative tax reform efforts are also aiming at increasing the credit rate, making the credit permanent and even expanding the credit to allow more small businesses to benefit.
The credit is an annual incentive available to taxpayers who incur qualified research expenses (QREs) for activities conducted within the U.S. that exceed a certain base amount, determined by the credit computation method elected by the taxpayer. There are two computation methods available. The regular credit method uses a base amount determined by a combination of the average gross revenue over the previous four years multiplied by a fixed-base percentage (based on historical revenue and QREs). Any excess amount over the base amount is subject to a credit rate of 20%.
The alternative simplified credit method uses a base amount determined by 50% of the average QREs from the prior three years. Any excess amount over the base amount is subject to a reduced credit of 14%. In the case where no qualified QREs were incurred in any of the three previous years, the credit rate is lowered to 6%.
Since the R&D credit is a dollar-for-dollar reduction in tax liability, even a small portion of qualifying activities can result in significant tax benefits. In addition, the IRC rules permit taxpayers to amend previously filed tax returns within a three-year window to reclaim credits previously missed.
In today’s competitive environment, companies cannot afford to overlook lucrative tax incentives that maximize tax savings and provide an immediate source of cash. If your company operates in the construction industry and performs any of the previously mentioned qualifying activities, there is a good chance that you would benefit from the R&D credit. The federal government awards billions of dollars in R&D credits every year, and if your company is not considering the potential of the R&D credit, you could be missing out on your share of these significant tax benefits.