Posted by Jeffrey M. Feingold on 06.02.16
Contractors can gain considerable benefits through federal and state research & development (R&D) tax credits. Knowing the specifics about eligibility, which party has rights and risks and how the credits are calculated can go a long way in maximizing your tax savings.
Construction project R&D is unlike typical manufacturing R&D where the business component is often obvious. Either a new product is being developed, or an existing product is improved. With a construction project, the business component is the design of the property that is ultimately built for the customer. This means that the design might relate to an entire building, a building system (e.g., HVAC or plumbing) or an infrastructure project like a bridge or highway. Therefore, it’s critical to know who has the rights to the tax credits.
In determining whether a contractor qualifies for the R&D credit, an important first step is a review of the pertinent contracts. To make this determination, an experienced R&D specialist should conduct a thorough contract analysis. It is also essential to document how the project meets the IRS’s four-part test for qualifying R&D activities, as well as to identify the different costs associated with the contract work, such as labor, materials and subcontractors. The potential ability for a customer to claim the R&D credit can be used by the construction companies in contract negotiations or bid-and-proposal requests. Determining which party has the rights and risks really comes down to which party retains ownership over the process, developed process and intellectual property.
The R&D tax credit is calculated in one of two ways:
The federal tax credit can be carried forward for up to 20 years and, depending on your company’s filing deadline, can be retroactive for the prior three years. State carryforwards are different—in some states, the tax credit can be carried forward indefinitely.
Depending on your company’s tax return filing deadline, it may be eligible to claim the federal R&D tax credit for the prior three years and the state credit for the prior four years.
The R&D tax credit can be a lucrative incentive for innovative businesses. Given the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, read our e-book: The Contractor's Guide to R&D Tax Credits, contact us at (800) 260-4138, or please leave us a message below.