A Design/Build Project
A design/build construction company began a new project with a rough sketch provided by the client/owner. The project entailed a three-story facility with an adjacent garage. The company studied and estimated alternative construction methods and led discussions with the engineer and architect to design building systems with approved cost and practice methods.
The site was located near a Residential Zone, and the client requested unique approaches to be made so the structure’s design would not look like a garage. The team tested schemes with false glazing storefronts, a vegetated green wall, and mesh screens integrated into the façade, all of which required structural and technical changes.
Other challenges during design included adding a level to the garage, redesigning numerous aspects of the facility’s systems, constant reworking of the design between shop drawings and construction drawings and lighting design changes while remaining in code.
While it may seem like this Design/Build Construction company was just doing their job, many of these activities qualify for a significant federal tax incentive: The Research and Development Tax Credit (R&D Tax Incentives). Originally enacted in 1981, this dollar-for-dollar tax credit was expanded with IRS rules that were finalized in December 2015. At that time, the main criteria for qualification of the credit, the discovery test, was replaced by a four-part test. A company no longer needed to discover something new to its industry in order to qualify for the credit. Now, it only needed to conduct activities within the U.S. that met this new test. As it turns out, a lot of the technical design within the construction industry meets these new R&D requirements.
In order to qualify for the Federal R&D Tax Credit, four things need to occur.
- The company needs to be trying to develop a new or improved product or process in the United States. In the construction industry, the technical design is the product.
- The activity needs to involve the hard sciences, like engineering.
- There needs to be some technical uncertainty at the onset with respect to the appropriate design.
- There needs to be an evaluation of different alternatives when the design is being developed – examples of this include systematic trial and error, modeling, and simulation.
Typical qualifying R&D Credit activities for general contractors include:
- Design-build construction
- Value engineering
- BIS modeling
- Means development
- Methods and construction techniques
- Design for LEED/green initiatives
- HVAC or electrical system design
- Development of installation methods
- System detailing for constructability
- Pipe design and testing
- Structural steel detailing
A Permanent Credit
The R&D credit has recently been made a permanent federal tax incentive, and a qualifying company can claim it yearly, resulting in a significant reduction in income tax liability. In addition, beginning in 2016, the credit can be used to reduce Alternative Minimum Tax (AMT) for companies with under $50 million of gross receipts. There is also an opportunity for certain startup companies to use their R&D credits to reduce a portion of their federal payroll taxes.
Today, tax incentives are more powerful than ever. Many construction firms are completely unaware that they may qualify. Let’s chat with no obligation and see if Cashflow Business Incentives can help you reduce your tax burden.