Have you Overlooked the Ongoing R&D Tax Credit for Construction Companies?

research and development in constructionAny downturn – significant or otherwise – in the overall economy can always be more easily weathered by larger firms while small and mid-size ones usually suffer disproportionately. For this reason and a few others, the recent economic slowdown prompted the Congress to pass two bills known as the “R&D Tax Credit” and the “Federal Energy Efficient Commercial Building Tax Deduction” – the last known more succinctly in knowledgeable business circles as 179D – to provide some relief to the smaller firms in construction and other industries. Unfortunately, less than 5% of eligible small and mid-size businesses have availed themselves of either of these tax credits. Is your firm one of them?

Some Background

Originally introduced by Congress in the 1980s to encourage innovation in the technology and biotech industries, the qualifying parameters of the original R&D Tax Credit and the pursuant tax deduction have been expanded dramatically and now encompass such relatively “low-tech” industries as construction. The second 179D also offers some compelling reasons for construction companies to examine the building solutions that they offer to their clients and to benefit from the tax credit program. Finally, individual states have also gotten into the act. More than 40 offer some additional relief from your state tax bill. Check with your accountant for the pertinent details.

Qualifying for these Programs is Difficult... but Rewarding

Far from downplaying the ease with which this tax credit can be earned, it is important to note that a construction company will have to develop a solid and very real contribution to new technology. This fact, however, does not mean that you need to develop a worldwide application- just one that adds some value at the local level.

In addition, a number of court cases have significantly loosened the restrictions on and expanded the definition of what constitutes research and development. For example, one ruling established that “knowledge that exceeds, expands, or refines the common knowledge” in the industry qualifies for the credit. In simple terms, the work just needs to be new to your industry, not new to the world at large. The result is the largest cumulative business tax credit provided by the Federal government – to the tune of almost $10B per year in business incentives.

The Future

No one can honestly say that they can tell where the vagaries of Congress will take the country but... it seems likely that these two tax credits will continue for quite some time. In addition to the natural momentum – or lack thereof - of our lawmakers, the deductions have served quite admirably in their purpose.

Qualifying is a taxing process but not impossible for even the smallest firms. For example, one firm was granted a significant deduction, worth hundreds of thousands of dollars, by “simply” developing a solution to a unique set of conditions that met not only the client's site requirements and municipal codes but also significantly improved the function and performance of the designed structures. In short, a better mousetrap – or drainage system! - can be worth a lot of money.

The two deductions are expected to last for another decade or more and were expected to help lower the United States' demand for fossil fuels by an amazing 30% - now a pipe dream in many people's minds as the current boom in domestic oil production has made these plans less imperative. Still, the deductions make great sense for any company on the cutting edge of their industry as their pursuit of new and innovative ways to meet their clients' needs will already drive their research and development efforts into new and profitable areas.

A Final Note

There is no doubt that keeping up with recently enacted governmental regulations, both good and bad, is problematic in a busy and growing company. Having the right tools like an integrated software accounting platform designed specifically for your industry can help tremendously. It will allow you and your staff to develop the reports necessary to make an informed decision and to easily deliver any necessary documentation to prove out your claim. For more information on the right accounting software for your company, check out our Software Selection Tool. This free resource can help you narrow down your options for choosing a construction accounting or ERP solution.

Here are two examples of companies offering accounting software specifically developed for the construction industry; Dexter + Chaney, and Dynacom ERP.

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