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R&D Tax Credits Can Ease Cash Flow for Construction and Real Estate Companies

Posted by Eric Olsen, CPA on Sep 21, 2020 9:00:00 AM

Does your real estate or construction company develop or design new products or processes, or enhance the ones you already have? Do you develop or improve existing software? If so, you may benefit from research and development (R&D) tax credits that can offset your company’s tax liability. Given these unsettled economic times, this is a critical time to take a fresh look at this valuable tax credit.

Contrary to popular belief, R&D tax credits are not only for scientists and researchers. Since its inception in 1981, the R&D tax credit has expanded to include businesses in many industries that innovate and keep jobs in the U.S. Federal legislation in 2015 made this valuable tax credit permanent, and today, nearly three-quarters of states, including Texas, offer state R&D tax credits.

Fewer than one out of 20 business owners who are eligible for the R&D tax credit actually claim it on their tax returns, forgoing millions of dollars’ worth of tax savings every year.

Highlights of the federal and Texas R&D tax credit include:

  • Eligible qualified research expenses (QREs) include wages, supplies, contract research, and the rental or lease costs of computers.
  • The approximate effective net credit is up to 10% of QREs for federal tax credits and up to 4% of Texas QREs.
  • Federal carryovers allow one year back and 20 years forward. Texas allows a 20-year carryforward.
  • Federal tax credits are permanent; Texas R&D tax credits cover reporting years 2014 through 2026.
  • Real estate and construction companies must qualify through a four-part test.

Qualifying Construction Activities

  • Design and engineering
  • Material selection
  • Value engineering
  • Experimentation with energy efficiencies, ranging from building design to lighting
  • Estimating and predesign
  • Sequencing in-field design changes
  • Integration with related systems
  • Compiling and testing software codes
  • Unit, integration, functional, performance and regression testing

Qualifying Real Estate Activities

  • Architecture and engineering services
  • Use of complex software to generate designs
  • Experimentation with multiple options

Four-Part Test

There is a simple four-part test that helps to determine qualified R&D activity:

  1. Business Component for Permitted Purposes
    Business component: Product, process, technique, formula, invention or computer software
    •Purpose: Functionality, performance, quality, reliability or durability
    •New or improved

  2. Technological in Nature
    •Process of experimentation based on engineering, physics, chemistry, biology or computer science
    •Existing processes acceptable
    •Capability, methodology or final or appropriate design of the business component

  3. Elimination of Uncertainty
    •Capability, methodology or final or appropriate design of the business component

  4. Process of Experimentation
    •Systematic evaluation of one or more alternatives
    •Systematic trial and error process

Your accountant can advise you about the eligibility of your activities and conduct a tax credit study. You will need documentation, including:

  • Payroll records
  • Project notes
  • General ledger expense details
  • Credible employee testimony

While claiming R&D tax credits does require an investment of your resources, these dollar-for-dollar tax credits can provide critical cash flow for your real estate or construction company. Some companies are able to capture hundreds of thousands of dollars in R&D tax credits.

The R&D tax credit specialists at Goldin Peiser & Peiser can help your business identify potential activities that may qualify for federal and state R&D tax credits and assist in pursuing them by conducting a tax credit study. If you have questions or concerns about R&D tax credits for your real estate or construction company, please contact the R&D Tax Services professionals at Goldin Peiser & Peiser or Eric Olsen at 214-635-2538.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Real Estate & Construction, R&D Tax Credits, Tax Credits