Did you know that R&D Tax Credits remain one of the most beneficial tax strategies that a company can employ? These credits apply to companies in many different industries, including the construction industry. What activities qualify for the credit? How can construction leaders benefit? We explore here.

What is the R&D Tax Credit?

The Research & Development (R&D) tax credit is for businesses of any size that design, develop or improve products, processes, techniques, formulas, or software. The credit is calculated annually based on the amount of qualified research expenditures (QRE) paid or incurred by a company. In general, the amount of credit represents between 7% and 10% of the QREs paid or incurred during the year.

What does the credit apply to?

Qualified research must meet the following four criteria:

• New or improved products, processes, or software
• Technological in nature
• Elimination of uncertainty
• Process of experimentation
• Eligible costs include employee wages, cost of supplies, and contract research expenses.

R&D Tax Credits for Construction Companies

At first glance, many construction and heavy highway contractors assume R&D tax credits don’t apply to their work. It’s a common misconception—and one that can leave valuable opportunities on the table. The reality? Today’s infrastructure and construction projects demand a level of technical expertise and innovation that often does qualify for this incentive.

While contractors may not always be the original designers, they’re the ones responsible for figuring out how to bring complex designs to life in the real world. That’s where the innovation—and the eligibility—comes in.

Construction firms often engage in activities that qualify under the R&D credit, including:

• In-depth evaluations of alternative construction methods, materials, and processes

• Developing design solutions for components and systems unique to a project

These are far from routine tasks. Today’s projects are more complex than ever, with rigorous regulatory, technical, and environmental standards to meet. Gone are the days of simply executing a set of drawings—contractors now solve major engineering challenges in the field.

Moreover, as public sector budgets tighten, there’s a growing trend toward design-build contracts. This shift places greater responsibility—and risk—on construction companies. Teams are investing more in trial and error, iterative problem solving, and engineering ingenuity to get the job done. All of which are key indicators of R&D activity.

If this sounds like the kind of work your firm does every day, we’re here to help you explore what’s possible. We’ve supported contractors across the country in identifying qualifying activities, documenting them effectively, and maximizing their credit.

What Activities Qualify for the R&D Credit?

Activities that construction companies engage in that commonly qualify for the R&D credit include:

• Developing shop drawings or Blue Beam, or CAD models for project components
• Analysis of alternative means and methods that should be used to construct a job per the design.
• Developing takeoffs and estimates for alternative means and methods.
• Design/build project activities
• Developing and testing value engineering alternatives to drive costs down on projects.
• Working with third party or internal engineers to developed designs that meet client, technical, and regulatory requirements.
• Developing multiple submittal packages detailing techniques, means and methods.
• Performing testing of constructed systems during the project to determine if requirements are met.
• Review of field data to identify deficiencies with work performed.

Most of the costs incurred on a construction project will not qualify for the R&D Credit. However, the wages and contractor expenses associated with the activities above can add up to a sizable credit to offset taxes.

Picture this

Take an example construction firm operated as a Partnership with around 1000 employees. Most of these employees are engaged in non-R&D activities. However, the wages of its estimators, project managers, superintendents, and project executives as well as the expenses paid to third-party consulting engineers were found to be associated with the qualified activities listed above.

The $566k in tax credits is passed through to partners to directly offset their income taxes owed. This example company also operates in a state that offers R&D tax credits, offsetting those taxes as well.

Do you need help figuring out if your processes qualify for the R&D credit? Contact us, we’d be happy to help.