Income taxes can be a major driving force in key business decisions on a daily basis. Income taxes have significant impact on cash flow, can influence decisions on how to price jobs, and can impact how much employees are paid. Taking advantage of tax credits can help strengthen cash flow and increase the ability to reinvest in your business for continued success.
If your construction business spends time and money on innovation, one possible credit to consider would be the research and development (R&D) credit. Currently, companies are able to write off costs incurred when developing new and improved products, as well as new or improved construction processes. The R&D credit will give your business an additional offset against your income tax liability dollar-for-dollar.
The Tax Cuts and Jobs Act (TCJA), which went into effect for the 2018 tax year, has made the research and development credit very attractive. The TCJA lowered the corporate tax rate to 21%, which indirectly increased the credit’s after-tax benefit. Also, the elimination of alternative minimum tax (AMT) will allow more companies an opportunity to take advantage of the credit. Below are some various additional benefits afforded by the R&D credit and as it relates to the TCJA for your construction company to consider.
The TCJA limits the net operating loss (NOL) deduction for losses generated after December 31, 2017. The limit allows a business to only offset 80% of its taxable income during the taxable year. Therefore, the credit can be applied against the balance of taxable income which could not be offset by the NOL.
For startup companies (qualified small businesses) with less than $5 million in revenue (and no revenue for the period of five years ending with the credit year), there is an additional benefit. These companies have the ability to apply the credit to offset up to $250,000 in payroll taxes each year up to five years. In other words, to qualify as a small business and elect the payroll credit for tax year 2019, a startup should have less than $5 million in gross receipts in 2019 and no income in 2014 or in any year prior to 2014. Companies will need to keep documentation of their activities and eligibility. Many startup companies have not taken advantage of this portion of the credit’s availability and immediate impact on the bottom line.
For taxable years beginning after December 31, 2021, companies will be required to capitalize and amortize research and experimental expenditures over a period of five years (which currently are deductible).
If you have a construction company and believe you might qualify for the research and development credit, please contact your local Blue & Co. advisor to learn more about the tax savings available for your company.