The United States enacted the Research and Development tax credit system in 1981. In 2015 the Protecting Americans from Tax Hikes Act made the credit a permanent part of the US tax code.
For companies to qualify for the credit their research must meet the following four tests:
- Business component test. The R&D must create a new or improved product or process, resulting increased performance, function, reliability or quality which they intend to use.
- Technological in nature. The company must show that they hard sciences (which includes engineering) to discover information which results in the new process or product. In this instance companies can use existing technologies in their research.
- Process of experimentation test. In order to pass this test the company must 1. Identify the uncertainty; 2. Identify other alternatives which could eliminate the uncertainty and 3. Evaluate the alternatives.
- Section 174 test. This relates to expenditures which can be claimed under the scheme. The expenditure must relate to the business or trade of the company and must seek to prove the process or product using. There are several exclusions which include research into similar processes or products, surveys, QC testing etc.
Companies in respect of the research may be able to claim the following expenses:
- Wages of those engaged in, directly supervise or directly support the research;
- Supplies directly used in the research;
- 65% of any amount paid or incurred by the company to any other person other than an employee.
Most small companies since 2007 have elected to calculate their R&D tax credit using the Alternative Simplified Credit. This simplified method simply calculates the credit as 14% of the difference between the current years qualifying research expenses and 50% of the average of the preceding three years qualifying research expense. An example of which is below
Current year Qualifying Expense: $150,000
Average of previous three years Qualifying Research Expense $125,000 x 50% ($62,500)
Subtotal $87,500
Tax credit (@14%) $12,250
If the company has no Qualifying Research Expense in the any of the preceding three years, then the ASC rate will be 6% for the claim.
There are other two other methods of calculation namely, 1. The traditional Credit Calculation and 2. Start Up Credit Calculation.
Within the construction sector there are many areas in which a company may incur qualifying research expense, for example:
- Developing new structural engineering designs and process
- Employing green building techniques
- New MEP designs to create more energy efficient systems
- Developing new civil engineering designs and process
- Creating new products / processes
If engineering is engaged to and successfully solves a construction related issue, then the process should be investigated in order to ascertain whether or not it qualifies for relief under the scheme.
This article contains information of general interest about current legal and accounting and tax issues and does not provide legal or accounting or tax advice. It is prepared for the general information purposes only. This article should not be relied upon in any specific situation without appropriate legal, accountancy or tax advice.
