r&d tax credit - can construction & engineering companies really qualify? By: louis sandor iii, cpa, ccifp, partner & peter sullivan, CPA
Originally introduced in the Economic Recovery Act of 1981, the R&D credit covers expenses paid or incurred for qualified research. The research must be undertaken to discover technological information and must be intended to develop a new or improved business component for the taxpayer. All activities of the research must be substantive elements of a process of experimentation to improve function, performance, reliability, or quality. The R&D credit can be utilized by mainly two means: a payroll tax offset for small business taxpayers or a dollar-for-dollar income tax reduction. Taxpayers may be eligible for the Qualified Small Business Tax Credit if their gross receipts are less than $5 million in the year the credit is taken and they incurred gross receipts for five or fewer years. The payroll tax credit offset cannot exceed $250,000 and may be used against the employer portion of social security liability. Those not eligible for the Qualified Small Business Tax Credit may be eligible for the regular R&D credit, but it is important to note that these taxpayers must incur federal or state income taxes in order to monetize the credit. In the first year of taking a credit, the taxpayer may be able to
look back to the three prior years to claim the credit. Any unused credit carries over for twenty years. In recent years, The Internal Revenue Service (IRS) created a four-part test to define what qualifies as research activities for the credit: 1) Technological in Nature Test – The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement. 2) Permitted Purpose Test – The purpose of the research must be to create a new or improved product or process resulting in increased performance, function, reliability, or quality. 3) Technical Uncertainty Test – The activities are intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product.
Accounting Corner
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ou may not be aware that your company may qualify for federal and state research and development (R&D) tax credits. We are not talking about the white lab coat drug research programs that can cost millions of dollars with no definitive ability to recoup costs until an approved drug is developed. Instead, we are talking about your everyday activities to construct something or being involved in constructing something. But beware, claiming credits requires a thorough contract review to determine experimental risk and rights of research.
4) The Process of Experimentation Test – The activity seeks to eliminate or resolve a technical uncertainty which involves an evaluation or alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods. Once the four-part test has been met, one must identify the cost of qualified activities to compute the credit. Expenses that qualify include wages paid to an employee engaging in qualified research activities, supplies used or consumed during qualified activities, and any expenses paid to third party contractors who assist with the qualifying activity. Research expenses conducted outside of the United States or its territories, research funded by another party, ordinary product testing, market research, and aesthetic cosmetic design do not qualify. Construction activities that are novel and innovative in nature that may qualify for the R&D credit include the following:
Utility & Transportation Contractor | june| 2020 19
