Posted by Jeffrey Feingold on 07.07.21

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 Projects are Complex

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.

Read our FREE guide: The Contractor's Guide to R&D Tax Credits

Determining Who Has Rights and Risks

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.

R&D Calculations

The R&D tax credit is calculated in one of two ways:

1. Regular Credit: A higher effective tax credit can be claimed by older companies by comparing current year expenses to a base amount stemming from data from the 1984-1988.
2. Alternative Simplified Credit (ASC): For all other companies, only three years of prior data is needed to compute a base amount. While the ASC results in a lower effective credit rate, the R&D tax credit can still add up to a sum too valuable to ignore.

When to Apply Credits

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.

Find Out if Your Activities Qualify

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.

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

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.