Why builders and remodelers should rethink the R&D tax credit

by Kevin Kalal, CPA, MBT

Most people think of white lab coats when they hear the words “research and development.” But when it comes to the research and development (R&D) tax credit, this stereotype couldn’t be further from the truth. The credit isn’t only for scientists and researchers. Nearly any type of business can qualify for it, including builders and remodelers.

I’m singling out these two business types because many of my clients operate in the construction industry. Whenever I mention the R&D tax credit to a builder or remodeler, they usually shake their head. “There’s no way we’d qualify,” they say. “We’re not doing anything revolutionary!”

But here’s the thing: You don’t have to be on the cutting edge of your field to qualify. You only need to engage in an activity that’s revolutionary to you or improve one of your existing processes. And because the credit directly offsets your tax liability, qualifying for it could give your business a substantial cash infusion.

Here are a few things builders and remodelers should know about the R&D tax credit.

First, what is the R&D tax credit?

The R&D tax credit has been around for more than 25 years. Generally speaking, the credit is designed to reward taxpayers for engaging qualified research activities (QRAs), which could include designing, developing, or improving products, processes, techniques, or software. An activity must pass each part of a four-part test by the Internal Revenue Code to be considered a QRA.

Your everyday work could count as a QRA.

Qualifying for the R&D tax credit isn’t as difficult or complicated as you might think. For instance, say you’re working with a client who wishes to use a type of material that you have not used before. However, through some experimentation you figure out how to apply this material and complete the job. The “figuring out” part—the time and effort you put toward it—could count as a QRA.

The credit could significantly offset your tax liability.

Business owners who qualify for the R&D tax credit can recoup current and previous years’ (up to three years) expenses for ongoing and completed QRAs. The credit is a dollar-for-dollar offset against taxes owned or paid. This means if you were to qualify for a $25,000 credit, this amount would be applied directly to your tax liability. It’s like getting cash back!

Needless to say, the R&D tax credit could provide a lifeline at a time when cash is tight.

Could you qualify for the R&D tax credit?

This is where things can get complicated. Determining whether or not you qualify for the credit—and for what amount—requires analyzing your QRAs as well as the time your employees spent engaging in them. But this isn’t something you have to worry about—we can take care of this for you. We also offer a complimentary initial R&D credit assessment, which lets you know if applying for the credit is worthwhile for your business.

Don’t leave money on the table.

If you think you could qualify for the R&D tax credit, don’t put off exploring your options. As I mentioned, it’s possible the work you do each day could count as a QRA, and the benefits of qualifying—namely boosting your cash flow—could be critical in these uncertain times. To get started, contact us today.