Contractors constantly find new ways to improve their work. Whether developing new processes or optimizing how you use materials on the jobsite, these innovative efforts could qualify your business for the Research & Development (R&D) Tax Credit. This federal incentive rewards businesses that create new materials or improve how existing ones are used.

What is the R&D Tax Credit

The R&D Tax credit was introduced to encourage businesses to innovate. While initially focused on technological advancements, this credit is now accessible to contractors who develop new processes, improve existing techniques, or create (or significantly modify) materials.

Qualification Test

Even if you’re not developing materials from scratch, your activities could still qualify for the R&D Tax Credit if they meet all of the IRS’ four-part test:

  1. New or Improved Business Component:
    • This applies whether you’re improving a process, developing a new technique, or creating a material that enhances your business operations.
  2. Technical Uncertainty:
    • The work must involve uncertainty that required experimentation to resolve. This could involve determining the best method for applying a material or achieving the desired performance.
  3. Reliance on Science or Engineering:
    • The work should involve principles from fields like engineering or material science. For example, using engineering principles to refine a process that improves the application or durability of a product.
  4. Process of Experimentation:
    • Your project should involve a process of trial and error to solve problems or improve outcomes. Whether you’re experimenting with installation techniques or testing a new material, the key is that you’re systematically working through challenges.

How to Claim the Credit

Here’s how you can take advantage of the R&D Tax Credit:

  1. Identify Qualifying Work: Look at your projects to identify where you’ve introduced new methods, significantly modified materials, or improved existing processes.
  2. Document Everything: Keep records of your experimentation, the challenges faced, and the steps taken to resolve them. This documentation is crucial for substantiating your credit claim.
  3. Consult a Tax Professional: A tax expert who understands the R&D Tax Credit can help ensure you claim all qualifying activities and expenses.
  4. File Your Claim: Use the credit to reduce your tax burden and reinvest in your business.

Trade Examples:

  • Architectural Glass & Metal: Contractors might innovate installation techniques for energy-efficient glass or collaborate with manufacturers to develop custom glass solutions.
  • Drywall Finishing: Experimentation with joint compounds and application methods could be conducted to reduce drying time and enhance finish quality, with potential adjustments to mixtures to meet specific project needs.
  • Flooring: Contractors could develop more efficient installation techniques for new flooring materials or refine the properties of adhesives or underlayments to improve performance.
  • Industrial Coating: Methods for applying corrosion-resistant coatings might be tested to improve adherence and durability, and some contractors may work with suppliers to create custom coatings.
  • Painting & Wallcovering: New spray application methods might be developed to minimize waste and ensure consistent coverage, and paint formulations could be modified to achieve better performance.