Most construction companies and contractors may be surprised to learn that of all business they are paying the highest tax rate.
See also Construction
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. It appears that construction companies pay an average tax rate of 30.3% while companies across other industries paid an average of 23.3.%. The good news is that construction companies can reduce their taxes by leveraging key tax incentives and credits. One lesser known credit to the industry is the Research & Development (R&D) Tax Credit. Traditionally used by larger companies focused on product development, it has become more popular with construction and others in recent years. The credit offers a meaningful tax savings to those engaged in qualifying activities. To help clients, prospects and others understand the credit and how to qualify, Hanson & Co, has provided a brief summary below.
R&D Tax 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. For example, if a process has been implemented which streamlines operations or increases efficiencies, then generally speaking it is a qualifying activity. Although there are many activities which may qualify a few industry related examples include; pre-construction planning, workflow improvements, new process for hard bids and internal software development.
In order to determine if an activity qualifies, there is a four part test applied to the company’s process and expenses. The test includes the following criteria:
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 stating the process.
If the process or activity meets the four part test, then there are qualifying expenses that are used when calculating the total credit benefit. These expenses include:
Payroll – The wages earned by those individuals directly involved in the research and development process and those supervising or assisting.
Materials – The cost of the supplies and materials used in the development of new products, models, etc.
Contractors – The cost associated with hiring outside contractors (where appropriate) to assist in research activities.
The tax benefit to each construction company varies based on a number of variables including qualifying expenses, number of new processes developed, etc. So the bottom line benefit will vary company to company. However, anyone that claims the credit can reduce both current year estimated tax payment and total income taxes owed.
It’s clear that construction companies and contractors can benefit from effective tax planning to reduce their tax rate. To accomplish this it’s essential work with a firm that can help leverage incentives to enhance your tax position. If you are interested in learning more about the R&D tax credit or would like assistance with year round tax planning, Hanson & Co., wants to help. For additional information, please contact us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.