When most people think of research and development, they picture high-tech labs or engineers in white coats tinkering with futuristic devices. But for general contractors, R&D is happening every day: on job sites, in planning meetings, and during the development of innovative building techniques. The federal R&D tax credit is a powerful but often overlooked tool that can help general contractors reduce their tax liability and reinvest in their business.
What Are R&D Tax Credits?
The R&D tax credit is a dollar-for-dollar federal tax incentive designed to reward U.S. businesses for investing in innovation. Originally introduced in 1981, it has evolved to include a wide range of industries, including construction.
These credits are available not only at the federal level but also in many states, making the potential savings even greater.
Why General Contractors Qualify
You might be thinking, “We’re not a tech company, how can we qualify for R&D credits?” The answer lies in how the IRS defines qualifying R&D activities. The construction industry is ripe with eligible projects, such as:
- Developing or improving construction techniques to increase efficiency or safety
- Engineering unique structural designs to meet client specifications
- Experimenting with new materials or green building technologies
- Solving complex site development challenges
- Designing or testing new HVAC, electrical, or plumbing systems
If your team is solving technical challenges, even if the project ultimately fails or the solution is not revolutionary, you may be eligible for the credit.
What Expenses Can Be Included?
Qualifying expenses may include:
- Wages of employees engaged in qualified R&D activities (including supervisors and support staff)
- Supplies used during the research process
- Third-party contractor costs
- Cloud computing costs related to the R&D efforts
The Benefits of R&D Tax Credits for General Contractors
Here’s how R&D tax credits can benefit your business:
- Reduce Tax Liability: Apply credits to offset income tax liability dollar-for-dollar.
- Improve Cash Flow: Retroactive claims can result in refunds for prior tax years.
- Reinvest in Growth: Use the savings to hire new staff, invest in equipment, or fund new projects.
- Gain Competitive Edge: Innovation leads to more efficient processes, higher quality work, and stronger bids.
Common Misconceptions
- “We don’t do R&D.” If your team solves problems on the job with unique or custom solutions, that’s R&D.
- “We didn’t invent anything.” You don’t have to create something new to the world—just new to your company.
- “The paperwork is overwhelming.” Partnering with a knowledgeable advisor simplifies the process and maximizes your credit.
Federal R&D Tax Credit Changes: New Opportunities for Real Estate Developers
While traditionally associated with technology and manufacturing companies, the federal R&D tax credit offers valuable applications in real estate that many developers and investors overlook. Recent legislative changes have significantly enhanced this credit, creating new opportunities for developers undertaking innovative projects.
Section 174 Relief: Immediate Expensing Returns
Beginning in 2022, tax law required businesses to capitalize and amortize research and development expenses over five years for domestic R&D (fifteen years for foreign R&D). This created substantial cash flow challenges for R&D-intensive businesses across all industries.
Recent legislation reverses this requirement for domestic R&D expenses. Through the creation of new Section 174A, taxpayers can once again immediately deduct domestic research and experimental expenditures for tax years beginning after December 31, 2024. Alternatively, taxpayers may elect to capitalize and amortize these costs over at least 60 months if that approach better aligns with their tax planning strategy.
Retroactive Relief and Catch-Up Provisions
The legislation includes two important transition rules that may provide significant tax benefits:
For All Taxpayers: Any remaining unamortized domestic R&D expenses from 2022-2024 may be elected to be fully deducted in 2025, or spread ratably over 2025 and 2026. This catch-up provision could create meaningful refund opportunities for eligible businesses.
For Qualified Small Businesses: Companies with average annual gross receipts of $31 million or less for the three tax years preceding 2025 can elect to apply the new immediate expensing rules retroactively to tax years beginning after December 31, 2021. This allows them to potentially amend returns for 2022 through 2024 to claim immediate deductions rather than amortization. The deadline to make this election is July 4, 2026.
What This Means for Real Estate Developers
Real estate developers engaged in innovative construction methods, sustainable building technologies, or novel design solutions may qualify for R&D tax credits. When combined with the restored immediate expensing under Section 174A, these provisions can significantly improve cash flow and reduce tax liability.
Partner with Experts
Maximizing R&D tax credits requires understanding IRS guidelines and properly documenting eligible activities. At CSSI, we specialize in identifying qualifying activities and capturing the full benefit of the R&D credit for general contractors. Our team handles the heavy lifting so you can focus on building. Contact us today!
