Construction Companies Might Be Eligible for an R&D Tax Credit and Not Even Know It
What do you think of when you hear the term "R&D"? If you picture CAD drawings and beakers bubbling, you're not alone – but research and development means a lot more types of work than you may imagine. In fact, your construction company might be eligible for an R&D tax credit without even realizing it.
Alex Helkamp, CPA, CCIFP, Tax Director at Redpath, works with construction and real estate companies to uncover the tax opportunities they may be missing. Here's what to know if you're curious about your eligibility or what work qualifies for an R&D tax credit.
Is Your Construction Company Eligible for an R&D Tax Credit?
Any business that uses science or technology to innovate or improve their products or the way you make them, the R&D tax credit might help you reduce your federal taxes (often about seven to eight percent of the qualified costs incurred).
Alex says there are four main criteria construction companies can use to help determine their R&D tax credit eligibility. You might be eligible if your activity meets these qualifications:
Qualified purpose: For construction companies, having a "qualified purpose" means that the work has to be in pursuit of a new or improved process or product. Crucially, it doesn't need to be a brand-new process or even an advancement in your industry – it just has to be something that's an innovation for your company's products or processes.
Technological in nature: For an activity to be considered eligible for an R&D tax credit, it has to employ some aspect of the sciences: biological, computer, engineering, or physical. (Construction companies are most likely to use engineering sciences in their work, but there are many ways to consider this stipulation.)
Elimination of uncertainty: You must show that you considered alternative methods for doing the work or completing the project in the way you did. Elimination of uncertainty is an attempt to prove that the qualifying activity was the appropriate way to design a product or achieve a goal.
Process of experimentation: This part outlines the way you reach the elimination of uncertainty: through experimentation. This can mean modeling, studying, testing, and developing prototypes, among other tactics.
Why Most Construction Companies Don't Know They're Eligible
The stereotype of laboratories and mad science has a way of making any other work seem ineligible, but you might be surprised at what qualifies for the R&D tax credit.
"When you hear 'R&D,' you don't think you're doing that kind of work," Alex says. "There's been a recent shift in perception, but back in the early 2010s, business owners thought it meant huge new medical innovations and technological advancements. But when you look at the innovations and developments being made, it covers a lot of kinds of work."
In the contracting space, a few examples of those kinds of work might include design/build projects, LEED certification and other energy-efficient designs, new material combinations, building information modeling (BIM), installing high-tech equipment, and more. Essentially, a new product or process doesn't need to be new to the world to qualify for the R&D tax credit. It just needs to be new to your business, Alex says, illustrating the broad range of developments that can be eligible. It's a misconception that's led many companies to leave the credit unclaimed.
"Years ago, most companies wouldn't be claiming this credit," Alex adds. Luckily, you can retroactively claim the R&D tax credit to make up for the missed opportunity: "If you didn't think you qualified years ago, you can go back to any tax year within the statute of limitations and claim huge credits" – sometimes with dollar amounts in the hundreds of thousands or even the millions. Alex also notes that, federal credit aside, many states, including Minnesota, offer R&D tax credits of their own.
Along with the financial benefit, Alex says there's another great reason for construction companies to get familiar with the R&D tax credit: "If you're not claiming it, your competitors are." Putting in the work to determine your eligibility, and then claiming the credit, can give you a significant advantage over your competitor – but only if you investigate it thoroughly with professionals.
Your CPA can help you start the conversation about your eligibility and the value of your potential tax credit. They'll help finalize and secure the tax credits your construction company deserves for the advancements you've made.
Alex Helkamp, CPA, CCIFP
Alex Helkamp is a partner in the business tax service area at Redpath and Company. As tax leader on the construction, real estate, and engineering industry team, he assists clients with business tax planning, implementation of accounting standards, mergers and acquisitions transactions, and other accounting services. Having earned his CCIFP certification in 2017, Alex maintains a vast knowledge of construction industry issues and tax challenges faced by companies in the industry. Clients appreciate his insights to help them defer taxes, minimize tax liabilities, recognize tax credit opportunities, and free up cash flows. Alex enjoys meeting with his clients as much as possible throughout the year to discuss their goals and objectives, understand their unique needs, and help them find solutions that maintain their business and financial health. He is a frequent speaker on topics related to the construction industry and he has provided public accounting services at Redpath and Company since 2011.
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