The term research and development has been more widely used for industries like the medical field or various scientific laboratory work. However, it’s happening in concrete work more often than most realize. And there’s a tax credit for companies that might be eligible should they meet a handful of criteria.
The Research & Development Tax Credit (R&D) comes into play if a contractor develops a new process to improve efficiencies or experiments with innovative ways to reduce or eliminate uncertainty within their business. If there was experimentation and/or testing done during the construction of a parking garage – for example – this work is where the R&D Tax Credit would be applied and considered. While it has been available in the Internal Revenue Code (IRC) for a while, it has unfortunately not been widely regarded.
The Credit can be applicable when new means and methods are developed and utilized to accomplish a job faster or more efficiently, or if new technologies “evolved” during the process. It’s when there’s an uncertainty in the project and the contractor needs to figure it out. Marty McCarthy, CPA, CCIFP, managing partner of McCarthy & Co. uses underpinning or the installation of concrete caissons as examples. “Those are the things that are going to require some technological research. There’s some uncertainty because you haven’t done it before,” he says.
These situations may include experimentation and testing, such as weight and/or soil tests to ensure the process will work, etc. It’s important to note that for the Credit to be applied it requires the work to be for a permitted purpose.
“If I'm underpinning, for example, maybe there's a way I can now cut my rebar more efficiently, tie my rebar more efficiently, or change the spacing of my rebar,” says McCarthy. “What science am I relying on so that I can change the load capacity based on the underpinning? Those are important things that are going to help make sure that you are doing things that are R&D in nature.” For example, the science starts to factor in when contractors consider problems below-ground in high-rise construction, like if the concrete will bear the weight, what happens if the soil is different than expected (sand vs rock), etc.
It’s clear that concrete contractors and construction professionals seem to be always on the edge of figuring out some sort of puzzle in front of them. Since the research and development concept can potentially apply to a number of processes in the construction industry, the Credit is organized by four criteria to determine if the work being done qualifies:
- It must be technological in nature.
- You must have uncertainty.
- You must utilize a process of experimentation.
- The work you are doing is for a permitted purpose.
Technological in Nature: Any research must be intended to discover new information for the business. It’s here where contractors can ask themselves if they are able to do something faster or more efficiently. However, it only applies to the architecture and design/build side of construction – so, not everything is going to be applicable.
“Activities that center around accounting, finance, marketing, or social sciences do not qualify,” explains McCarthy. Contractors should ask if the research is intended to discover new information for the business; if they are able to do “this” better, at a faster rate, more efficiently, and still deliver on their project.
Uncertainty: Acknowledging the fact that the situation requires new technologies to complete the project in accordance with the plans – this is uncertainty. For example, if a contractor is building a bridge on structural steel, the uncertainty lays at the execution of the contract: what is the underpinning plan, how will equipment be used to maximize the efficiency, how will the delivery system be implemented, how will the methods be tested to make sure they improve the process?
However, it’s not as simple as figuring out how much concrete one can place efficiently in a day or minimizing waste with the greatest return. “The information must be intended to eliminate uncertainty concerning the development or improvement of products, processes or techniques,” says McCarthy.
Experimentation: For work to qualify, contractors also must evaluate alternatives to the original design. In other words, ask themselves, “Is there another way?” Develop a hypothesis, test it, and conduct trial and error. These aspects of experimentation are necessary to qualify for the Credit.
Permitted Purposes: Construction action must relate to the development of a new or improved product, process, or design that attempts to improve the function of the performance, reliability, or quality of the project, product, or process, and it must be done for a permitted project or purpose.
The Start of the Journey
Contractors can get started by examining whether they are taking advantage of all the available tax credits to them. McCarthy’s advice: find a professional. “Hire experts that really understand the industry, not the buddy, not the friend, not the cousin,” suggests McCarthy.
Even though it feels like everything a contractor does is research and development, not all concrete work will qualify. The advising expert you work with will have better insight at seeing if the R&D done will meet the criteria. McCarthy explains that while new garage placements, routine, or repair work will generally not qualify for the Credit, there may be unique challenges that do apply from one project to another.
It’s also important to understand that the purchase of a new machine won’t be enough. For example, McCarthy & Co. has clients that will likely never qualify for the Credit because their work primarily focuses on sidewalks or residential flatwork. Even though a new equipment purchase might help place concrete faster and more efficiently, as far as the Credit is concerned – that hasn’t improved the process since the work’s method hasn’t changed.
The journey starts with having a reasonably sustainable position with an engineering study (or studies) done. An expert will analyze the project and time spent, and will review total costs, which will allow them to determine whether the R&D Credit can be allocated.
Advisors at McCarthy & Co. will conduct a comprehensive report, complete necessary forms, and lay out the calculations. But, the first thing they do for new clients is talk to them about their research and development work and then conduct a deep dive when appropriate to determine whether that R&D qualifies any of their projects for the Credit.
Another reason why McCarthy suggests leaning on experts:
When I'm looking for a concrete job, I need to hire the right concrete company that understands what I'm trying to do. Contractors should talk to their professionals and ask if they are eligible for this R&D tax credit. They're good at being contractors, we're good at doing the tax code. If their business stays around the same, this is going to be something they can get in perpetuity every year.
If contractors hadn’t taken advantage of it yet, McCarthy adds that contractors are likely able to go back three years, amend returns and, get the money back for the prior years that they didn't claim R&D.
Ultimately, the journey starts and ends with two simple questions. Are you eligible? Do you meet the four criteria?
With a good expert on your side, it never hurts to ask.