global Tax How can R&D Credits be used for Construction Companies? October 05, 2023 Construction leaders…have you explored the benefits of Research and Development (R&D) tax credits? Don’t miss out on the benefits. Learn more about construction activities that qualify for this valuable tax strategy. 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 softwareTechnological in natureElimination of uncertaintyProcess of experimentationEligible costs include employee wages, cost of supplies, and contract research expenses. How can construction companies benefit? Often, construction and heavy highway contractors do not utilize (or underutilize) R&D credits, thinking the benefit does not apply to them. This is not the case. In fact, completing complex projects today requires unique technologies and technical expertise. While a construction firm may not be the designing engineer, they are the ones that have to figure out how to actually implement the designs. This requires at least two processes that qualify for the R&D credit: In-depth analysis of alternative construction means and methods, techniques, and processes Designs for certain components. Modern construction and infrastructure projects are highly complex and contain many moving parts. They also must meet increasingly stringent technical and regulatory requirements. Gone are the days when a firm is handed a set of construction documents that it can easily implement. Additionally, as governments around the country tighten their budgets, they are increasingly relying on construction firms to design and build jobs. This shift to design/build has required construction companies to take on more risk and invest more in engineering and trial and error to figure out how to complete a project. 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. Total Wages 2021 $55,100,794 Total Eligible R&D Wages $6,647,855 Total 3rd party engineering costs $437,489 Total Tax Credit $566,025 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.
