How to Claim R&D Tax Credits for Construction Companies in 2024

Many construction companies don’t realize they may qualify for an R&D tax credit. R&D tax incentives for construction companies do exist, and recent rulings have made them easier to claim than ever. 

The research and development tax credit is accessible to all construction companies that engage in qualifying activities.

The following article will discuss:

• Which activities qualify for the R&D tax grant
• The documentation you’ll need to prove your activities qualify as R&D 
• The optimal way to make your tax claim for maximum benefit

What is the R&D Tax Credit?

The research and development tax credit encourages businesses to innovate and think ahead. It credits an average of 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses.

The R&D tax credit applies mainly to small and medium-sized businesses. It provides tax incentives for:

• Developing new products or services
• Improvements in old products or services
• The creation or testing of new prototypes 

How Does the Research & Development Tax Credit Work?

The R&D tax credit provides tax breaks to companies that conduct research and develop new products, improvements, and other innovations.

If the firm has been in business for less than 5 years and has less than 5 million in gross receipts, the R&D tax credit can be applied to payroll taxes. This allows firms that have yet to profit to benefit.  

Can Construction Companies Claim The R&D Tax Credit?

Yes, construction companies can claim the R&D tax credit, leading to substantial tax savings. Some could come as a refund to prior tax liabilities, effectively acting like a tax grant. 

The R&D tax credit is a dollar-for-dollar tax liability reduction, leading to substantial savings. Understanding which activities count is the key to getting the most out of the claim.

The federal R&D tax credit has evolved significantly since it began. Many industry professionals have successfully argued that their line of business also provides R&D, including the construction industry.

That’s why the IRS now offers broader eligibility criteria that includes various activities beyond traditional research, including improvements in design, materials, and processes used by the construction industry.

Also to note is that it is activities new to the company, rather than new to the world, that qualify, thereby broadening the scope for construction companies to benefit​​.

The IRS provides guidelines on claiming the R&D tax credit. These explain the importance of documentation and adherence to filing requirements to maximize one’s potential claim. 

How to Claim R&D Tax Credits for Construction

Claiming R&D tax credits for construction companies is usually worth it. However, the process can take a moment to navigate the first time you do it. 

The Harper vs. IRS Commissioner case shows that construction companies could qualify for many activities that were originally thought to be outside the scope of R&D.

Here are some of the first steps to get started.

1. Check Your Eligibility

To determine if your projects qualify as R&D, you must assess whether they aim to develop or improve products, processes, or materials. 

Typically, activities that push boundaries and contribute to solving industry-wide issues qualify for R&D tax credits, including:

• Innovating on current industry standards
• Developing new materials
• Inventing or improving upon design approaches 

2. The Four-Part Test

To qualify for the R&D Tax Credit, your projects must be engaged in activities that pass the four-part test that was created by the precedent set by the 2023 IRS case:

1. Permitted Purpose – The project aims to create or improve the functionality, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty – The project begins with uncertainty about how to achieve the project goal and involves work to eliminate this uncertainty.
3. Process of Experimentation – The project involves a systematic process of experimentation by evaluating one or more alternatives.
4. Technological in Nature – The experimentation relies on the hard sciences, such as engineering or computer science.

Although still somewhat subjective, using previous examples to show that one’s efforts fall within the four parts is the most straightforward way to claim your case.

3. Speak to a Tax Planning Team

Consulting with a licensed tax attorney or a professional specializing in R&D tax credits is a good next step. 

These experts can offer personalized guidance to ensure your claim gets the maximum benefit. They do this by: 

• Identifying all your company’s qualifying activities and expenses
• Navigating the complex landscape of R&D tax credits
• Ensuring proper documentation​

Examples of R&D for Construction

Construction companies often qualify for R&D tax credits through activities that might not seem innovative at first glance.

However, the categories are quite broad and can include many seemingly everyday activities. 

Examples of qualifying R&D activities in construction include:

• Developing new or improved construction materials
• Designing innovative building structures
• Streamlining design and construction with Building Information Modeling (BIM) through advanced 3D modeling and interoperable software
• Designing unique bridges or roadways to address structural and environmental challenges
• Utilizing novel construction techniques in new or complex environments for greater adaptability
• Employing value engineering to enhance the functionality or cost-effectiveness of projects
• Advancing energy efficiency in building design and features

How The IRS Calculates the R&D Credit

The IRS uses two primary methods for calculating the R&D tax credit: the traditional and the Alternative Simplified Credit (ASC) method.

1. Traditional method – Document and calculate 20% of research expenses over a base amount. The base amount is a fixed-base percentage multiplied by the average annual gross receipts for the last 4 years.
2. Alternative Simplified Credit (ASC) method – This method calculates the credit based on 14% of the qualified research expenses (QREs) that exceed 50% of the average QREs for the 3 preceding tax years. If the company had no research expenses in any of the previous three years, the credit is 6% of the QREs for the current year​​.

The approach you should choose depends on the calculation method that best suits a company’s financial situation and R&D spending patterns.

How Much Can Construction Companies Earn from the R&D Tax Credit?

The financial benefit from R&D tax credits comes from the costs of eligible R&D activities. This covers a broad range, defined under three major categories: 

• Wages
• Materials and supplies
• Third-party contractors

The R&D tax credit provides dollar-for-dollar tax savings, reducing a company's tax liability by 14% over 50% of the average of the last 3 years’ qualifying research expenses using the simplified accounting method. 

Alternatively, the traditional method reduces liability by 20% of qualifying costs above a specified baseline amount. 

There is no cap on the amount that can be claimed each year. Unused credits can be carried forward for up to 20 years. In addition, companies may amend previously filed tax returns to claim the credit retrospectively.

Frequently Asked Questions

How Far Back Can You Claim R&D Tax Credits?

You can claim R&D Tax Credits for the last 3 tax years. If your company has missed out, you still have a chance to amend past returns and get the credit. This could lead to significant savings on already completed research and development initiatives.

How Should Construction Companies Document R&D Expenses?

Keep detailed records of all R&D-related expenses. For example:

• Payroll records
• Supply costs
• Contractor invoices

You need documentation that clearly links expenses to specific R&D projects—this will provide the strongest backing for your claim.

What Doesn’t Qualify for the Credit as a Construction Company?

The following types of R&D do not qualify for the credit as a construction company:

• Routine data collection
• Ordinary modifications
• Post-construction quality control 

Whatever you claim should demonstrate the pursuit of some kind of innovation or significant improvement to routine processes.

Start Your R&D Claim - Do You Qualify?

At RevenueSafe, we explore a business’s R&D methods and expenses to ensure a compliant claim of maximum value. Our process is simple, straightforward, and easy to use. So don’t wait, take the opportunity now to save money for your business.