A major tax write-off most contractors don’t know about
For a contractor, it may seem unlikely that something called the Research and Development Tax Credit would apply to your business.
Here’s what you need to know.
The credit and its benefits
The Research and Experimentation Tax Credit (also known as the R&D credit) is available to companies that spend money on research and development in the United States. What most contractors don’t realize is that the IRS has a relatively broad definition of what research and development means. Many are surprised to learn that the definition includes design build construction. The credit was originally rolled-out as part of the Economic Recovery Tax Act of 1981. It was set to expire at the end of 1985, but was extended many times and made permanent in 2015. It’s designed to spur economic activity through innovation. Companies that perform qualifying activities receive a reduction in taxes by claiming the credit. Taking advantage of credits could increase the cash flow for your business by thousands of dollars per year or more.
How contracting business can leverage the credit
More and more these days, contractors must develop new processes and solutions through design-build construction to get work and meet client needs. The good news is that much of this development work could qualify for the R&D credit.
Has your firm ever:
- Significantly updated or improved an existing system to meet client requirements?
- Developed a new way to do construction in order to work in an unusual or challenging location?
- Invented a new piece of equipment to complete a job?
- Created a new construction material or component because you couldn’t find anything right in the marketplace?
- Came up with a novel fabrication or installation process?
- Developed specialized software to design a project?
If you answered yes to any of these questions, then your firm could qualify for a credit on costs related to qualifying activities.
Think you’ve missed out?
Do you think your firm has done work that might have qualified for the R&D credit? The good news is that companies can take the credit retroactively. You may be able to claim the federal credit for qualifying activities you did up to three years ago, within limits.
What’s next
Taking advantage of the R&D tax credit can make a big difference to the bottom line of your contracting business and let you bid on projects you couldn’t have considered before. Before you claim the credit or begin a research and development project, consult with a tax expert that will make sure you do everything right. We’ll advise you on how to structure your research and development projects correctly and document everything according to strict IRS standards.
