Contractors and R&D Tax Credits

See also Construction

It’s clear that the once harsh economic climate that drastically impacted construction companies and contractors has changed.

The industry is expected to realize another 5% growth in 2015 according to the Metro Denver Economic Development Council. This is certainly welcome news for industry companies. As companies continue to grow it’s essential not to overlook tax incentives which can help reduce tax liabilities. One such incentive is the Colorado research and development tax credit, which offers compelling tax savings to qualifying companies. To help clients, prospects and other understand more about this tax credit and its qualifications; Hanson & Co has provided a brief summary below.

Overcoming Misconceptions

A common misconception surrounding the R&D tax credit is that qualifying companies consist of employees in high tech labs analyzing test tubes. This is not the case whatsoever. Despite the tax credit’s name, its qualification requirements include many activities performed by contractors’ every day. It also encompasses the development of products, processes, techniques and some specialized formulas. Such developments can be new, but also just improvements. Whether new or improved, the developments can be application-specific, and work under contract does not necessarily mean the activities cannot qualify.

Qualifying Activities

Contractors often qualify for the tax credit via activities that are aimed at developing the construction process for specific jobs or those intended to improve efficiencies. Activities that are the best candidates for the credit include:

  • Design-build services
  • LEED projects
  • Value engineering

Additionally, there are even some pre-construction planning and development of means and methods for plan-spec and hard-bid jobs that also qualify for the benefits. Since this incentive is an enticing dollar-for-dollar reduction in tax liability, even a small portion of activities that qualify can result in significant tax benefits.

Tax Credit Incentives

Colorado R&D Benefits

For construction companies who perform R&D type work in Colorado the following incentives apply:

  • The Colorado tax credit is 3%. The credit is based on the increase of a company’s research and experimental expenditures within an enterprise zone over the average of such expenditures conducted in the same enterprise zone during the previous two income tax years.
  • Some rules allow taxpayers to claim credit for research activities that would not qualify for the federal research tax credit. Qualified research must satisfy only three criteria:
    • It must be technological in nature.
    • It must be useful in the development of a new or improved product or component of the business.
    • It must utilize the process of experimentation.
  • To qualify, the expenses must be made in one of the enterprise zones in Colorado, which are identified by the Colorado Office of Economic Development.
  • For any credit generated on or after January 1, 2012, enterprise zone credits must be pre-certified by the zone administrator prior to any business activity that would generate the enterprise zone credit.
  • Qualified research expenses generally include wages (minus fringe benefits), supplies, contract research expenses, and payments for the right to use computers.
  • You claim the credit on the return for the taxable year you incurred the qualified expenses.

Whether or not a construction company has a significant amount of design-build work, it is of utmost importance that R&D tax credits are thoughtfully considered as part of the tax planning process. Rules permit the reclaiming of these cash benefits for prior years within a three-year window. Therefore, the time is now to consider all available opportunities.

Contact Us

It’s possible your Colorado construction or contracting company may qualify for this state tax incentive. If you are interested in learning whether your company qualified, Hanson & Co can 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!

Construction, TaxScott Norquist