What Can You Claim with the R&D Tax Credit for Construction Companies?

Imagine accessing a "secret cash stash" to help expand your construction company's operations. 

Like investing in that drilling machine you've been eyeing, onboarding new employees to increase productivity, or purchasing new materials for your business? That would be a dream come true, huh?

Well, there might actually be a way to achieve this without a secret stash, and it's called: the R&D Tax Credit. 

It's been around since 1981, but it's one of the most overlooked and lucrative tax credits in the US that construction companies qualify for.

In this blog post, we’re discussing what the R&D Tax Credit is, why it's suitable for your construction company, and what you need to qualify for it.

Let's dive in.

What is the R&D Tax Credit?

The Research and Development (R&D) Tax Credit is a tax credit that supports companies' growth by offsetting some of their costs of research and development.

In a nutshell, the IRS will subsidize certain activities in your construction business that qualify as R&D to incentivize innovation and encourage growth investment. 

Therefore, the R&D Tax Credit can help you increase cash flow and maximize savings during hard and uncertain economic times.

While it’s often overlooked by many construction companies, R&D takes place during many different phases of a construction project, including initiation, predesign, off site fabrication and building information modeling. 

Each activity has a small element of qualified R&D expense that can add up to big savings. 

“Less than 3 in 10 businesses who qualify for the credit actually claim it, while virtually every large company makes the claim.”

‍

‍

Why is the R&D Tax Credit Good for a Construction Company?

If you're not convinced R&D tax credit is worth your effort, here are just a few of the benefits that you can enjoy from claiming the credit:

• It provides an immediate source of cash for many small and mid-size companies
• It can create a significant reduction of current and future years’ federal and state tax liabilities
• It is an actual dollar-for-dollar credit against taxes owed or taxes paid. Additionally, the taxpayer may be able to expense all qualifying R&D costs in the year incurred
• More than $7.5 billion in federal R&D tax credits alone are given out annually
• A business can take the credit for all open tax years (generally the last three or four years plus the current year). Additional years may be available if the taxpayer is in a net operating loss or alternative minimum tax position
• Tax credits can be carried forward up to 20 years
• In addition to the federal R&D tax credit, many state R&D tax credits are available
  

And did we mention it’s free cash?

‍

What Tasks Qualify Under the R&D Tax Credit?

It’s likely that your construction business is already doing qualified R&D activities in every day jobs without even realizing it. 

For an activity to be considered a QRA (Qualified Research Activity), it must rely on chemistry, physics, and engineering; it must also involve testing and evaluating procedures.

Here are a few examples of construction tasks that could qualify for the R&D Tax Credit:

Qualifying Research Activity (QRAs)

• Modifying existing techniques or processes
• Introducing the use of new technology or material that hasn't been used before due to technical risks
• Designing or developing new or alternative structures
• Developing construction solutions to save time
• Identifying and adapting new construction tools to conserve the environment and improve efficiency
•  Creating new electrical and mechanical systems in buildings
• Mathematical modeling to predict and solve building problems

Qualifying Research Expenditures (QREs)

• Contract research: Payment to freelance or any outside consultants for construction designs or outside testing.
• Wages: Wages of the professionals supervising, assisting, and performing the R&D qualified activities.
• Supplies: Cost of technology and materials used in developing new prototypes, pilot designs, and models.

‍

How Much Can You Save from the R&D Tax Credit?

How much your construction company can save on taxes with R&D Tax Credit comes down to the activities performed and the size of your business.

The federal credit amount ranges from 5-10% of your qualifying R&D expenses, in any given year. And you can claim even more through state R&D tax credits. 

So, let’s say you spend $200,000 on research activities in 2023, you will be able to claim up to $20,000, dollar for dollar against your federal taxes.

We found this useful calculator to help. 

In general, you can expect to save tens of thousands, if not hundreds of thousands of dollars, depending on the number of expenses that qualify for the credit.

New businesses can also claim an R&D tax credit of up to $250,000 per year against their payroll taxes, as long as they make less than $5M in revenue and have been in business less than 5 years. 

We recommend working with your experienced construction accountant to determine how much you can save overall in your business. 

‍

What Documentation Do You Need?

While claiming the R&D Tax Credit isn't rocket science, it's not as simple as checking boxes, either.  There are due diligence steps that you’ll need to take and document along the way in order to qualify for the credit. 

The first step in doing this right is getting the correct documents in order, which include the following:

• Project notes, including test records, design drawings, blueprints, marketing materials, and other documents showing any processes that impact your research.
• Timesheets records for meetings, payroll, work plans, and other R&D qualified eligible activities
•  Invoice and receipts of contractors who do third-party research for your company
• Payroll information for employees or managers directly involved in R&D activities.
• General ledger reports with a list of supplies and expenses related to R&D and which ones are not.

What you can’t do is estimate your expenses -  it’s a bad practice that will end up costing you more in the long run.

‍

So, What Now?

We can agree on two things; as a construction company, taking advantage of the R&D Tax Credit is in your best interest. And two, it will take a lot of work to achieve that.

Instead of using a crazy amount of time trying to figure out what to do, you can outsource it to us. We will help you with the following:

• Identify what activities in your construction business could qualify for R&D tax credits
• Do a comprehensive review of these activities to maximize your claim
• Work with your tax preparer to ensure that you are taking full advantage of the tax savings

We've successfully done this for many clients and already have a working procedure.

Ready to save in your construction business? Let's talk. 

‍