Contractors Shouldn’t Ignore the Research and Development Tax Credit

By Brandon Cook, CPA | Partner, Team Member of the Construction Services Group

It’s no secret that margins and cash are tight for small to medium-sized businesses, especially contractors. Another basic truth is that no one likes writing tax checks to the federal or state government. While paying taxes is a fact of life, the federal government does have many business incentives to keep more cash in business owner’s pockets. The Research and Development (R&D) tax credit is one such incentive that can lower your overall tax rate and put cash back into you or your business’s pocket.

The R&D tax credit has been around for over 30 years, but has increased in popularity over the last decade. The majority of companies that historically have taken advantage of this credit tend to be in the manufacturing sector, however, many other types of industries can qualify for this credit as the IRS’s definition of R&D is very generic and can cover a number of activities. Any type of new product development, process development, technique improvements, etc. could potentially qualify for the R&D credit. Yes, even contractors can perform R&D activities.

The R&D tax credit is a federal tax based credit, but many states, including Indiana, also have their own R&D credit for state purposes. Additionally, the tax regulations allow open tax years (typically the past 3 years) to be amended to go back and claim credits for past years R&D activities. Technically, the R&D tax credit is set to expire on December 31, 2013, but most CPAs anticipate it will be extended into future tax years, as has been the case a number of times in its 30-year existence.

While the benefits of the R&D tax credit can be lucrative, it does come with a few potential drawbacks. First, it requires additional time for employees and business owners to gather the information needed to calculate and substantiate the tax credit. Second, the R&D tax credit is one of the more scrutinized tax credits by the IRS, so it could increase the chance that the IRS may audit your company. However, in our opinion, the majority of the time the benefits far outweigh the associated risks.

Even though you may not feel your day-to-day activities may constitute R&D in the traditional sense, it wouldn’t hurt to discuss with your CPA if some of the processes or daily operations could qualify for this credit. Feel free to contact Brandon if you would like additional information.

Contact:

Brandon Cook CPA | Partner, Team Member of the Construction Services Group
Telephone: 317-241-2999 | Email: bcook@greenwaltcpas.com