Construction Companies: Know Your R&D Tax Benefits

Of particular relevancy to construction companies is the research and development tax credit, a tax incentive program. Also known as the research and experimentation tax credit or the research tax credit, it allows construction companies to work at maximum efficiency. Many wrongly think that the R&D tax credit doesn't apply to construction, because that industry doesn't involve scientists. But a range of machinists and engineers are constantly developing new systems and designs, and the companies they work for are entitled to their piece of the tax-break pie.

Indeed, it would be a shame if eligible construction companies overlooked the tax credit; your business may be eligible to file an amended return and claim the credit for the previous three years — more money in your pocket to grow your business and create new jobs.

The credit has been part of the Internal Revenue Code since 1981, but the IRS isn't giving away the tax credit — you need proper documentation of your activities and to correctly apply the law. Learning what can or can't receive tax credits is worth a powwow with your accountant.

You may use one of the two following methods of accounting for R&D expenditures:

  1. Deduct your R&D expenditures in the tax year you paid or incurred the expense.
  2. Amortize expenditures over a period of not less than 60 months.

And what is considered applicable R&D expense? In general, wages and salaries of employees and supervisors conducting research, supplies and a portion of research contracted to outside entities are often qualified for the credit. It's not meant to cover buildings, equipment, overhead expenses or nonwage benefits for personnel.

Expenses Qualified for the Credit
In fact, there's a multipart test to establish whether particular expenses are qualified for the credit. Expenses must be incurred in the course of conducting research that:

  1. Roughly follows the scientific method of inquiry and evidence.
  2. Is technological in nature.
  3. Relies on principles of physical or biological sciences, engineering or computer science.
  4. Will be used to develop a new or improved product, process or software that will be sold, leased, licensed or used by the taxpayer.
  5. Seeks to improve the quality, functioning or performance of a product.

Expenses that don't qualify include:

  1. Research to improve style, taste, cosmetic or seasonal design factors.
  2. Efficiency, management or consumer surveys.
  3. Research in the social sciences, arts or humanities.
  4. Research conducted outside the United States.
  5. Research funded by another entity.

There is no bright-line distinction between activities that qualify and those that do not, and thus, this has been a source of friction between the IRS and taxpaying firms. There even have been court cases to better define the credit that have indeed stretched acceptable expenditures.

Do you want to make sure you're getting the credits and deductions you're entitled to? The laws and rules are complex, but we can help make sure you're getting everything your company is entitled to.