At the beginning of June, the IRS issued regulations allowing companies to use a simplified method for filing the research and development (R&D) tax credit. The method is now available for amended tax returns in addition to originally filed tax returns.
“This new rule is great for construction contractors, architects, and engineers,” says Steve Roark, a federal tax principal with CliftonLarsonAllen. “It allows a significant retroactive benefit for larger engineering projects that require unique design solutions.”
Under the previous regulation, businesses that wanted to apply the credit to an amended tax return had to use the standard method of calculating the credit, which was somewhat complicated.
The new rules allow a business to use qualified expense data instead of gross receipts to calculate the minimum spend amount required before the credit kicks in.
“The simplified accounting method creates significant cash flow and simplifies the process of supporting the credit,” says Roark. “More businesses may be able to obtain the credit since they no longer have to include gross receipts in the computation — in some cases this created an insurmountable hurdle.”
Who qualifies for the tax credit?
While any business engaged in research might qualify, Roark says construction contractors and design professionals are typical beneficiaries in the real estate marketplace, as well as engineering and architectural firms involved in a variety of firm fixed price development contracts. Contractors and designers requiring engineering of electrical, mechanical, HVAC, environmental, roadway, subcontracted specialty work, and those adopting the 2030 Challenge may also qualify.
The R&D tax credit can cover research activities that require experimentation and analysis of alternative methods, formulas, and techniques. These activities typically span areas from building information modeling (BIM) and 2D and 3D modeling to general engineering. The goal of the activity is usually to create new and improved business components and designs.
How it affects businesses
Under the new regulations, filing amended tax returns can generate refunds for taxes previously paid for 2010 - 2013. Here’s an example:
An engineering firm performed 1,000 contracts in 2012. Most were routine, but last month the firm noticed it had one job eligible for the R&D tax credit. Two million dollars of wages related to the research were performed on that job. Relying on the simplified accounting method, the firm can file an amended return to claim this credit, receiving between $80,000 and $120,000 in tax savings.
“Until the new rule emerged, the only credit possible was under an unfavorable set of complex rules. If the firm did a bit of research every year, the dollars can add up fast if it files several years of amended returns at once,” notes Roark. “Businesses must act quickly though. Refund claims must be submitted within the statute of limitations, which generally is three years of the original return due date of the return or, if extended, three years from the filing date.”
How we can help
Talk to your tax advisor about whether you are eligible for the R&D tax credit under the new rules. CLA can help by looking at contracts, change orders, personnel involved in development, the development process, systems used (BIM, 2D, 3D, etc.), and other factors to determine if filing for the credits is viable. We also provide an estimate of the filing fees so you can determine if filing makes economic sense.