A Contractor’s Guide to Construction R&D Tax Credits

Contractors that provide design-build services using new and innovative construction techniques and enlist engineers and architects to provide construction services are most likely able to qualify for the research and experimentation tax credit (commonly referred to as the R&D tax credit).

Many activities required to design and construct a new building, or expand/improve an existing structure, may meet the construction R&D tax credit requirements. Specifically, activities performed by the project architects, engineers and other design service consultants (including electrical contractors doing design work, HVAC fabricators, mechanical design, etc.) are mostly likely to qualify.

To maximize the benefits of any research performed during the construction of a building, it is critical to understand the design and engineering processes to identify potential qualifying activities. In most instances the delivery of architectural, engineering and certain design consulting services generally follow a standardized process that involves six phases.

Phase I – Conceptual Design

This first phase of the architectural/engineering design process typically involves allocation of space (stacking and blocking), space planning, and assessment of available and required square footage.

In order to determine if and how the proposed site may accommodate the overall functional and nonfunctional elements required by the client (for example, placement of personnel and equipment), the architects/engineers will most likely need to complete qualifying activities to validate it meets the specific needs.

Phase II – Schematic Design

This next phase typically involves exploring the general concept of the building. Several schemes will be designed, and the building owner will select one, generally resulting in these qualifying activities:

Consideration of several alternatives for development of the selected space.

Determination of (on an overall basis) how each alternative may be constructed, given architectural and related principles.

Phase III – Design Development

This portion of the architectural/engineering process typically involves expanding the selected design, including assessment of alternative materials and the cost of various options.

Qualifying activities take place as the architect is called upon to resolve major design issues related to fitting the selected architectural scheme into a workable overall plan.

Phase IV – Construction Documents

Phase IV typically involves reducing the design concepts to precise drawings, which will be complete enough to allow permitting and final cost estimates.

Since it represents indirect construction labor, typically the only time this stage will have qualifying credits is if the drawing process reveals the need to reassess the design development.

Phase V – Construction

Assistance with the actual construction process takes place during this phase, which represents direct and indirect construction labor. In most cases you would not have qualifying construction R&D activities unless rework or change orders require the design from the development stage be reassessed.

Phase VI – Commissioning/Testing

This final phase of the architectural/engineering process typically involves certification that the structure has been assembled successfully.

Due to this phase being related to the quality control process, the only instance in which qualifying activities may occur would be if testing identifies necessary rework, which in turn leads to reassessment of the initial design.

Cashing in on Construction R&D

While the architects and engineers typically engage in some activities that might qualify as construction R&D, the extent varies. For this reason it is important to have a your construction CPA perform a detailed analysis to mitigate any risk during an IRS exam.

Managing the construction R&D tax credit process can be difficult and time consuming. Rely on our team of construction accountants in Michigan, Houston or Ft. Lauderdale to help you identify qualified activities and cash in on the lucrative, dollar-for-dollar credit.