The Research and Development (R&D) tax credit is commonly used for companies performing and paying for qualified research. The credit offsets federal income tax liabilities for these expenses, and can even be used to offset payroll tax liabilities for eligible small businesses. Although most people think of research as laboratory sciences or medical research, the real estate and construction industries also have a huge opportunity to take advantage of these credits.
What research qualifies for the R&D tax credit?
For expenses to be eligible as “qualified research” for the R&D tax credit, they must be all of the following:
- Produced while working towards discovering information that is technological in nature
- Intended for making a new or improved business component
- Proposed to settle technical uncertainty around a product or process
- Substantially all the events are related to experimentation and are updating or creating a new function, performance, reliability or quality
How does the R&D tax credit work?
Tax credits offset a company’s tax liability dollar for dollar, making them more advantageous than an ordinary deduction.
There are a couple different ways to calculate the R&D credit. The first is referred to as the regular method and requires detailed historical records regarding items such as wages and supplies. The second is the alternative simplified method. This method is an election that cannot be applied retroactively.
Additionally, for eligible small businesses, the tax credit can be used to offset Alternative Minimum Tax (AMT). These businesses cannot be publicly traded and must have average annual gross receipts of less than $50 million for the 3 preceding years.
How can the real estate and construction industries use the R&D tax credit?
One eligible expense for construction contractors and real estate developers is the use of complex software to generate designs or to experiment with multiple options. The costs of highly skilled architects and engineers can add further eligible expenses.
Contracts are important to keep in mind if you are considering these tax credits. Only the construction company or third-party that is paying the construction company can utilize the credit for a particular project. As a contractor, the company would need to have economic risk. A fixed-price model has shown to substantiate economic risk better than a cost-plus model. For a fixed-price model, the contractor is obliged to produce an end product even if they cannot do so within the set price.
Below are some examples of construction projects that could potentially qualify:
- Experimentation with water usage efficiencies
- Experimentation with electrical usage efficiencies
- Experimentation with other energy usage efficiencies such as lighting and building design
- Experimentation with alternative energy design
- Experimentation to mediate regional climate issues
- Experimentation in waste reduction