Building and Construction: R&D Tax Credit Benefits

Architecture, Building & Construction and the R&D Tax Credit

Small businesses in the construction sector can significantly benefit from the Research and Development tax credit by claiming eligible activities such as the development of innovative construction techniques, the improvement of construction processes, or the creation of custom tools. These efforts often qualify as research and development, even if they occur on construction sites. For startups, the R&D payroll tax offset is particularly valuable: it allows qualified companies to apply the credit against payroll taxes, helping to reduce labor costs and free up cash flow. This can be a vital source of funding for growth and continued innovation in a competitive market.

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Founded in 1984 by J.W. Norris under the name Reed & Co., Swanson Reed has grown to become one of the world’s largest firms specializing in Research and Development (R&D) tax credit consulting. We boast numerous publications. Our artificial intelligence software, TaxTrex, is a state-of-the-art AI language model capable of preparing R&D tax credit claims in just 90 minutes. Our R&D credit audit insurance policy, creditARMOR, is one of the most affordable audit management products on the market.

If you have questions or need further assistance, please call or email our CEO, Damian Smyth, at (000) 000-0000. Feel free to book a quick conference call with one of our national R&D tax credit specialists at a time convenient for you.

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Construction Case Study

Business Scenario

Freeman Home Builders (Freeman) is a custom home construction company that handles the design, construction, and management of home builds from conception to handover.

In 2012, Freeman identified that inefficiencies occurring during the construction process were the result of poor industry practices, which were manual, resource-intensive, and poorly organized.

Freeman saw the need for new all-encompassing software capable of managing all aspects of its business instead of existing market technology that focused solely on design. Freeman formulated a hypothesis for its new R&D project:

“Is it possible to design and develop a management system to handle all aspects of a construction project by integrating design, customer relationship management (CRM), and accounting software functions?”

The company believed its new management software (FMS) could be achieved by implementing four key activities of Research and Experimentation. To be eligible, Freeman had to meet four main criteria, known and developed by Congress as the Four-Part Test.

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Freeman’s Eligible R&D Activities

Design and development of a series of prototypes to achieve technical objectives (FMS design).

This activity focused on the feasibility of designing and developing a management system to handle all aspects of a construction project by integrating design, CRM, and accounting software functions.

After cycles of coding, testing, and recoding, Freeman was able to demonstrate the theoretical feasibility of developing FMS.

Testing and data analysis to achieve reproducible results to a satisfactory standard and to test the hypothesis (development and testing of the FMS prototype).

The hypothesis of this experiment was to demonstrate that the theoretical conclusions of the design phase could be realized through the development and testing of FMS and to conclude that a management system could be designed and developed to manage all aspects of a construction project by integrating design, CRM, and accounting software functions.

Background research to evaluate current knowledge gaps and determine feasibility (background research for FMS design).

Freeman engaged in background research for three years which included the following activities:

Literature research and review
Consultation with industry professionals and potential clients to determine the level of interest and commercial feasibility of such a project
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project
Consultation with key component/part/assembly suppliers to determine factors they believed important in the design and to gain an understanding of how the design needed to be structured accordingly

These activities qualified as R&S because they helped identify key elements of the research project.

Continuous analysis of customer or user feedback to improve prototype design (FMS R&D feedback).

Freeman’s R&D work in this phase included activities such as continuous analysis and testing, and continuous development and modification to interpret experimental results.

These activities were necessary to evaluate the performance capabilities of the new project in the field and to improve any design flaws, thus qualifying as R&D work.

Live Webinar: The R&D Tax Credit in the Architecture, Building & Construction Sector

Duration: 60 minutes

Learning objectives include:

An overview of R&D tax credits
Identifying qualifying research activities
Defining the 4-part test
How to substantiate activities through documentation
Identifying qualifying research expenses

Cost: FREE

Knowledge Level: Basic*

R&D Tax Credit Training for the Construction Sector

directive for LBI taxpayers

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Definition of Qualified Research

Qualified research consists of research aimed at developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities eligible for the R&D credit are described in the “four-part test” which must be satisfied for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty regarding the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, the method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or method to achieve that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
Technological in Nature: The process of experimentation used to discover the information must be fundamentally based on principles of hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Freeman keep?

Similar to any tax credit or deduction, Freeman had to keep business records outlining what they did in their R&D activities, including experimental activities and documents to prove that the work was conducted systematically. Freeman saved the following documentation:

Error logs and corrections
Conceptual sketches
Technical drawing revisions
Screenshots of various build versions / final version
Email correspondence
Progress reports and meeting minutes
Staff timesheets
Tax invoices
Patent application number
Backup copies of the program and reports for each release
Documentation of changes and source code in an online and private revision control system

This is an excellent example of being “compliance ready,” which means that if you were selected for an audit, you could present documentation to show the progression of your R&D work.