Many small to midsize construction companies don’t realize the Federal Research & Development tax credit (“R & D”) is available to them. This credit can assist in growth by providing capital through tax savings. The development of unique functional and energyefficient designs allows contractors to take advantage of these credits. This incentive had been extended recently and many feel that this credit will become permanent sometime in the near future.
Qualified R&D expenses are generally for the following:
New Product Development
Incremental Product Development
New Process Development
Incremental Process Development
The credit is comprised of three types of qualified research expenditures:
Internal wages paid to employees for qualified services
Contracts research expenses
Supplies used and consumed in the R & D process
To qualify for the credit, the taxpayer must pass four tests:
The activity must rely on a hard science such as engineering, biological or physical science.
The activity must relate to the development of new or improved functionality, performance or quality features of a structure or component of a structure. Technological uncertainty must exist at the outset of the activity.
A process of experimentation must be conducted to eliminate the technological uncertainty.
Architecture and engineering firms frequently invest substantial time, money, and resources in advancing and improving building designs and processes. Construction contractors have their architectural and engineering employees conduct activities which are often overlooked as R & D activities. When these employees develop and design new innovative construction techniques, their activities most likely qualify for the R & D tax credit.
Qualifying initiatives and activities generally fall within 5 categories:
The key to obtaining the R & D credit is distinguishing between qualified and non-qualified research activity and expenses.
Calculating the R & D tax credit: The calculation of the research credit has been made easier since 2007. Taxpayers now can elect the Alternative Simplified Credit which equals approximately 9% of the qualified research expenditures for the current taxable year that exceeds 50% of the average qualified research expenditures for the three taxable years preceding the current tax year.
The R & D credit continues to be underutilized by qualified companies and their business management teams, particularly within the Architectural, Engineering and Construction industries. The underuse of this credit stems from a misunderstanding of qualification and documentation requirements for Federal and State credits, along with a fear of triggering an IRS audit. A permanent R & D credit would create stability and certainty and increase investment by the private sector.
ARTICLES INCLUDED HEREIN DO NOT CONSTITUTE AN OPINION AND ARE NOT INTENDED OR WRITTEN TO BE USED, AND THEY CAN NOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER. This publication is designed to present matters of general interest relating to accounting, taxation and business management. Articles were written by the tax department of Castellano, Korenberg & Co., CPA’s, P.C. Please consult your CK & CO adviser before taking any specific actions.
©2015 Castellano, Korenberg & Co., CPA’s, P.C.