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Question and Answer: R&D Tax Credit

Q: I keep hearing that contractors can qualify for an R&D tax credit. Is this something I should look into?

A: The research and experimentation (R&E) or research and development (R&D) credit is designed to reward companies for developing new and improved products and processes in the United States. There are four basic requirements an activity must meet in order to qualify for the credit. Generally speaking, it must…

  • Relate to the development or improvement of a business component. This definition would generally include research and design activities undertaken by a design-build contractor to develop or improve its “product” – a building and its design.
  • Be intended to eliminate technological uncertainty. Design-build contractors regularly rely upon the engineering disciplines to design facilities. For instance, design-build contractors may evaluate how various building systems will interact with one another, design alternative electrical configurations, or calculate structural load requirements.
  • Be technological in purpose. Many processes involved in the design and construction of a building entail using new and innovative materials, alternate methods for assembling components, or other technology-oriented activities.
  • Involve a process of experimentation. Design-build contractors often rely on BIM or CAD modeling, engineering simulations, and systematic trial and error to eliminate uncertainty related to a specific building component, facility or technique.

Qualifying expenses must relate directly to the research and may include wages, supplies, and a portion of related contract labor expenses. Depending upon the credit methodology elected, the tax credit will amount to approximately 14 or 20 percent of those expenses in excess of a “base amount” which must be calculated using one of several IRS-approved methods. Note also that the IRS has designated the R&D tax credit a Tier 1 issue, which means it is closely scrutinized and thorough documentation is a must. Further, many states have an R&D tax credit.

The R&D credit is scheduled to expire at the end of 2011, but since its inception in 1981 it has expired and been retroactively reinstated 15 times. It remains politically popular and may well be extended again – or even made permanent.

Despite these uncertainties, if any portion of your construction process could be considered research and experimentation, it could be worth your while to investigate further to see if you qualify for this tax incentive.