Tax-saving opportunities for the housing and construction industries.

• Author: Stepan, Anna

During this past year, most income tax professionals were focused on meeting filing deadlines, assisting clients with questions regarding Paycheck Protection Program loans, navigating the tax law changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and keeping their businesses moving forward despite significant challenges created by the COVID-19 pandemic.

Amid all that, it is important to not overlook several tax-saving opportunities that have been around for a while and may not be current headline news. For CPAs who specialize in serving the housing and construction industries, advising clients to take advantage of the Sec. 45L credit, the Sec. 179D deduction, and the research and development (R&D) credit may be second nature. However, for those who have a more general client base, it may be helpful to have a refresher, or perhaps an introduction, on how businesses can qualify for these incentives and how tax preparers can assist them in claiming these tax benefits.

Explanation of the incentives

R&D credit: The R&D credit is an often misunderstood and overlooked tax benefit. The name brings to mind images of white lab coats, working in clean rooms, and products that are new to the world. Perhaps a more apt name for this credit would be "the new or improved product or process credit."This is because Sec. 41 defines the activities that can qualify as those having a purpose of creating new or improved business components, i.e., products, processes, techniques, formulas, inventions, or software. The key phrase here is "new or improved," and the application is to the taxpayer and not necessarily "new or improved" to the world. This means a wide variety of industries and taxpayer projects might contain qualified research activities. The Code also requires that the activities be for the purpose of discovering information that is technological in nature. To meet this standard, qualified research activities must rely on principles of the physical or biological sciences (e.g., physics, chemistry, biology, and/or material sciences), engineering, or computer science.

In addition to developing a new or improved business component and being technological in nature, the activities undertaken for a qualified research project must also meet a third requirement regarding the elimination of uncertainty. This uncertainty requirement is often where confusion about qualified research activities comes in. Qualified research activities will eliminate uncertainty if the information available to the taxpayer before the activities are undertaken does not establish the capability or methodology involved for the development, improvement, and/or appropriate design of the business component.

Finally, because of the uncertainty, the qualified research activities will require a process of experimentation. Experimentation that meets this last requirement can include systematic trial and error, prototype...