The construction, engineering, and architectural industries took a devastating blow when the COVID-19 pandemic swept the nation. However, forward-thinking companies looked past lockdowns and saw opportunities; during their idle time, they began to innovate. They imagined action steps they could take to improve their processes and soon began testing those hypotheses. Consequently, they improved their products and services, moved ahead of the competition, and expanded their business through growth and development. While their net revenue and cash flows may have taken a nosedive, the R&D tax credit proved to be an optimal way to increase cash flow and reduce financial burdens.
Grinding to a halt to devise a remedy may seem like “business as usual.” After all, it happens so often it’s almost commonplace for an obstacle to arise, hindering progress. But that’s only a superficial view; there’s an often-overlooked dimension – one that rewards you for developing a cutting-edge solution.
Did you know that when you improve your process you may qualify for an R&D tax credit? Key players in construction – from contractors to engineers to designers to architects – all play a pivotal role in developing a revolutionary improvement to your infrastructure.
During the design and construction process, companies routinely run headfirst into complications that require a workaround. Naturally creative individuals often push boundaries to the limit while ensuring their designs maintain form and function. But this can incur additional costs for their company without any relief.
All is not lost if you take advantage of the tax credit for research and design, as you can claim the credit retroactively. You can claim the R&D tax credit for three prior open tax years if you have never claimed the credit before. And if you have had a loss, you may be able to carry over the credit for future profitable years.
The list is extensive, but below are some of the most common design and development activities:
• Modeling and prototype development
• New or streamlined processes that increase a product’s reliability
• Trial and error experimentation with new materials
• Complex systems integration design
• Developing or improving equipment
• Designing and developing innovative buildings or structures
• Designing and developing new electrical or HVAC systems for energy-efficient buildings
What are the exclusions?
While there are a host of activities that qualify, some do not meet the requirements. Examples include:
• Routine engineering
• Improvements that are purely for aesthetic or seasonal purposes
• Efforts to improve management efficiency
• Research in the social sciences, arts or humanities
• Research conducted outside the United States
• Any projects funded by another party or through grants
Take the four-part test to determine R&D credit eligibility
The IRS created a test comprised of four qualifiers that any project must meet to be eligible for an R&D tax credit. Here’s a summary of the general requirements:
1. Permitted purpose. The activity must be intended to develop or improve the functionality, performance, reliability, or quality of a business component (product, process, technique, formula, invention or software). Note: the endeavors do not need to be successful. The greatest misconception about R&D tax credit qualification is that credits are only awarded to companies that were successful in their attempts to improve a process.
2. Elimination of uncertainty. The intention of an activity must be to gather information in order to eliminate technical uncertainty. For example: is the proposed activity possible and if so, how would you approach it?
3. Technical in nature. The activity must be in one of the “hard sciences” to qualify, which in our case applies to engineering-based research.
4. Process of experimentation. The activity involves evaluating different alternatives via a process of experimentation. It could include a systematic trial of simulation that would potentially achieve the desired result.
R&D Tax Credit Reality Check
It’s common for construction, engineering, and architecture companies to ignore the benefits of the R&D tax credit or think that they won’t qualify. Even those who experiment with a new process may erroneously and prematurely disqualify themselves because it was unsuccessful – or believe it’s too complicated to even apply. But this is a myth!
Many may wonder if it’s worth the effort. When in doubt, consider this fact: companies can earn up to 13.5 cents of R&D tax credit (federal only, plus state when applicable) for every qualified dollar.
It may seem counterintuitive that a company that is losing money is required to pays taxes, but that’s how the system works. Every company that has employee payroll in the US actually pays payroll taxes. Recent updates to the tax code now allow unprofitable technology and biotech startups to reduce their payroll taxes by up to $250K annually.
Unprofitable companies with qualified research expenditures in the US can now use those qualified expenditures as credits to lower the amount of payroll taxes they pay – reducing their burn rate.
How to Get Started
Before you take the first step, you will want to talk to an R&D tax credit expert that has deep knowledge and success in performing the R&D tax credit study; Astute is the perfect fit for companies including those in construction, engineering, and architecture. These companies are not conventionally associated to venture into R&D, therefore, many CPAs and tax firms without R&D experience may not be aware of the credit to offer to their clients. Contact Astute to learn if your business may qualify.