R&D Tax Credits - Heating Up Innovation Throughout the HVAC Industry

R&D Tax Credits - Heating Up Innovation Throughout the HVAC Industry

Posted by William Mehi on 05.31.19

The demand for HVAC (heating, ventilation and air conditioning) equipment in the United States is projected to have exponential growth in the next few years. The HVAC Industry supports the development of highly efficient technologies for end-uses in commercial and residential buildings, water-heating, as well as refrigeration, automobile and aircraft systems. HVAC companies and contractors across the United States are increasing their focus on manufacturing more eco-friendly HVAC systems and technologies that provide ease of use with better energy efficiency. With rapid urbanization energy conservation is looked upon more critically, leading HVAC companies to focus on energy and associated costs required to run the equipment throughout its lifetime. Companies engaging in innovative efforts to better HVAC systems design, manufacturing or technology components are eligible for federal and state R&D tax credits. The HVAC industry is conducting activities every day that could qualify them to claim the benefits of the R&D tax credits. 

The Research & Development Tax Credit

The federal government implemented the Research and Experimentation tax credit in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the program was meant to be a temporary measure to give the economy a boost. After many temporary extensions, the tax credit was made permanent by Congress in 2015 to allow companies that create innovative products and processes to receive tax credits for the qualified activities they conduct. Historically applied to technological and biomedical research work, the scope of what the government considers “research and development” has expanded over the years to include work done in the HVAC industry.

HVAC industry engineers, designers and machinists often spend a substantial portion of their time developing new and innovative designs and processes in an effort to remain competitive.  Integrating technology with the use of IoT (Internet of Things), furthering development of smart AC’s that are voice controlled (Alexa), or smart adjustable AC’s that increase or decrease tonnage usage based on the number of people in the room are just a few activities performed that can qualify for the R&D credit. Opportunities to claim the Research and Development (R&D) tax credits for the HVAC industry are abundant.

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Which Activities Qualify?

Many activities in the HVAC industry will qualify for the R&D tax saving credits, including:

  • Improving overall process to increase efficiencies
  • Pre-construction planning
  • Utilizing 3D printing processes for parts and components
  • Testing mechanical system performance
  • Conducting building information modeling (BIM) for coordination with various systems
  • Value engineering
  • Developing means, methods and fabrication techniques for sheet metal
  • Improving installation means and methods for alternative components and materials
  • Designing systems for better airflow and energy efficiency
  • Designing electrical systems for efficient power usage
  • Water drainage and management
  • Designing systems for better air filtration and humidity
  • Preparing system detailing for component routing and fitting
  • Improving installation means and methods for alternative components and materials
  • Fabricating improvements to system assembly
  • Analyzing dew points and air flow moisture content to determine optimal components and materials
  • Meeting customized requirements for healthcare and other specialized applications
  • Evaluating new component and material combinations

4 Part Test

The activities and associated expenditures (derived mostly from employee time, consultant expenses and related R&D supplies) of a company can qualify for the R&D tax credit if the activities meet the requirements of the four part test established by the IRS:

  1. Qualified Purpose- The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality.
  2. Technological in Nature– The research must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  3. Elimination of Uncertainty– Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology. 
  4. Process of Experimentation– Experimentation can be demonstrated through prototypes, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.

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