By Samantha Schact
and Josh Levy
This is an encouraging time to be in the construction industry.
For the first time in almost a decade, all of the biggest parts of the industry are expanding. Additionally, more clients are willing to pay increased construction costs for green building projects. These trends blend well to create opportunities through the pursuit of the federal government’s research and development tax credits.
The R&D tax credit is the largest the federal government makes available to businesses. It is a dollar-for-dollar credit against taxes owed or paid. Businesses can claim the credit for all open tax years and sometimes more if a business is operating at a loss or an alternative-minimum-tax position. Once obtained, the tax credit can carry forward for up to 20 years. The R&D tax credit is a selling point for contractors and design professionals promoting ways to return value to owners.
Despite what the R&D name might imply, the credits can go to businesses other than just those with scientists in lab coats performing experiments. The IRS uses a four-part test to determine whether activities qualify for the tax credit.
To qualify, the activity first must rely on a hard science, such as engineering, computer, biological or physical science. Second, it must be related to developing a new or improved feature of a structure or component of a structure. Third, there must be some sort of technological uncertainty, at the beginning of the project, about the component that will be improved or developed. Finally, there must be an experimentation process that is used to eliminate the technological uncertainty.
While this may seem to require invention, an activity can in fact qualify merely by being new and relatively untested in the individual applicant’s business, not necessarily in the world. LEED projects and other green building initiatives offer one way that construction companies or project owners can qualify for the tax credit. Among the activities deemed qualified in past green building initiatives, for example, have been plans to replace brick cladding with energy-efficient, synthetic stucco.
Once the IRS’s four-part test is satisfied, businesses can generally claim an R&D tax credit for three types of expenses: wages paid to employees who are performing qualified activities, supplies used and consumed during the R&D process and contract expenses for non-employees who perform qualified research activities on the company’s behalf. The tax credit can lead to significant savings. For example, one general contractor with $16 million in annual revenue received a $165,000 R&D tax credit and another with $73 million in annual revenue received a $214,000 credit.
Any business considering the R&D tax credit should be sure to keep detailed records of all the qualified activities performed. Maintain all diagrams, schematics and meeting notes, as well as time sheets describing R&D tasks performed by employees, even if they are salaried employees. Businesses can use all of an employee’s wages for the credit if the employee spent 80 percent of his time doing qualified research and development. But this must be proved using adequate documentation.
It bears noting that obtaining the credit is not always guaranteed. Contractors should be sure, when they are selling a project, to disclose the possibility of a critical review or rejection of green building goals. As green building initiatives became more popular in the past decade, litigation has inevitably followed.
Increased demand in the construction industry will also surely mean increased competition as well. For that reason, consider giving your business an edge when bidding on projects by offering the globally responsible pitch of green building together with the possibility of cost recovery using the R&D tax credit.