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Recently construction company owners and contractors learned an unsettling fact about taxes. It was revealed that of all various industries, construction companies pay the highest federal tax rate. According to a U.S. Department of the Treasury report, it was determined that from 2007 to 2010, on average, construction companies paid a higher federal tax rather than any other industry – an average of 30.3%. This is 8% higher than the average of other companies. The good news is that through proper tax planning and leveraging key incentives, the tax rate can be reduced. One lesser known credit which can be leveraged by industry companies is the Research & Development (R&D) Tax credit. To help clients, prospects and others understand how they can qualify for the credit and its benefits, JLK Rosenberger has provided a brief summary below.
What is the Credit?
This tax credit is a general business credit available to those engaged in the research and development of new processes, formulas, software, and designs of new projects and systems. Originally the credit was claimed by larger companies with formal R&D departments. However, now many companies of various sizes across different industries have found that they can also claim the credit. Construction companies that have implemented internal changes such as internal software development, LEED projects or even workflow improvements may be eligible.
4 Part Test
In order to determine if an activity qualifies, there is a four part test, which requires the following criterion be met, including:
- The purpose of the activity must be to create a new or improved process, application, techniques or formulas that serve the general business purpose of the company.
- The activity must be technological in nature and should include some engineering or computer science in the development process.
- Needs to be a level of uncertainty in the product or process development when research is started.
- Cost must be directly attributable to a process of experimentation (testing, prototypes, etc) and there should be no certainty of success when starting the process.
If the process or activity meets the four part test, there are rules about what expenses should be included in credit calculation. These include the payroll expenses resulting from the research, cost of materials and cost of any outside contracts used in the research process.
The tax savings varies from company to company and is based on a number of variables including costs, timeline, etc. The bottom line is that a qualifying construction company can effectively reduce their taxes for the current year and for the past three years (if qualifying R&D occurred during that time).
Tax savings is top of mind for every business owner. Find out if your company can qualify for this benefit based on activities that are being planned or are already completed. If you would like to conduct tax planning or want more information on the R&D tax credit, JLK Rosenberger wants to help. For additional information please call us at 949-860-9902, or click here to contact us.