How to Claim the R&D Tax Credit in the Construction Industry

Every time your team solves a structural challenge on a job site, tests a new material for durability or develops a more efficient building method, you’re doing exactly what the federal government wants to reward. The Research and Development (R&D) tax credit applies to construction companies far more often than most owners realize. If your business is tackling technical problems and trying new approaches, you may be leaving significant tax savings unclaimed.

What the R&D Tax Credit Means for Construction Companies

The R&D tax credit under Section 41 of the Internal Revenue Code provides a dollar-for-dollar reduction in federal tax liability for companies that incur qualified research expenses. 

Two calculation methods are available. The Regular Credit method generally provides 20% of qualified expenses over a calculated base amount. The Alternative Simplified Credit offers 14% of qualified expenses over 50% of the average for the three preceding tax years. Many construction companies find the simplified method easier to implement since it requires less historical data.

To qualify, your activities must pass a four-part test. The research must be technological in nature and rely on principles of engineering or physical sciences. It must aim to develop or improve a product, process or technique. Your team must conduct a process of experimentation to evaluate alternatives. And the work must relate to function, performance, reliability or quality. While these requirements sound technical, construction companies perform qualifying work regularly without recognizing it.

Construction Activities That Qualify

The day-to-day problem-solving that happens on complex projects often meets the qualification threshold. When project managers evaluate different construction methods to complete a job more efficiently, they’re conducting qualified research. When engineers test alternative materials to determine which performs best for a specific application, that experimentation counts.

Design-build projects present substantial opportunities because your company bears responsibility for both designing and executing the final product. Developing value engineering alternatives, analyzing different structural approaches and creating solutions for site-specific challenges all involve the technical uncertainty and experimentation that the credit rewards.

Energy-efficiency work frequently qualifies when it goes beyond routine code compliance and involves technical uncertainty and experimentation. If your team designs HVAC systems for optimal airflow, tests insulation materials for thermal performance or develops approaches to meet sustainability standards, those activities may generate credits. The same applies to work that helps buildings withstand seismic events, extreme weather or other environmental conditions.

Expenses You Can Claim

Wages make up the largest category of qualified research expenses for most construction companies. You can claim wages for employees who directly perform research, directly supervise it or directly support it. This includes time spent by project managers, estimators, engineers and superintendents when they’re evaluating alternatives and solving technical problems. For employees who spend at least 80% of their time on qualified research, you can claim their full wages. For others, you claim the portion attributable to qualifying work.

Supplies consumed during experimentation also qualify. Materials used specifically for testing or prototyping can be included, though normal project materials generally do not. Contract research expenses paid to third parties for qualified research on your behalf can be claimed at 65% of the amount paid.

Documentation Is Critical

Recent court cases have reinforced that the IRS expects detailed, contemporaneous records of research activities. For each qualifying project, you should document the technical uncertainty you faced, the alternatives you considered and the process you followed to evaluate them. Project files, meeting notes, design iterations and correspondence often contain this information.

Time tracking matters significantly. Employee records, project management software and job costing systems can all serve as sources. The IRS looks for evidence that links employee time directly to specific projects and activities. Reconstructing this information after the fact is far more difficult than capturing it in real time.

Beginning in 2026 tax year, the IRS requires more detailed reporting on Form 6765, including information about specific business components generating qualified expenses. Section G was optional for tax year 2025 filings, giving companies time to prepare for the mandatory reporting now in effect.

Additional Opportunities

Beyond the federal credit, many states offer their own R&D tax credits. Construction companies operating in multiple states should track activities by location to capture both federal and state benefits.

Smaller construction companies have a particularly valuable option. Eligible small businesses with gross receipts of $5 million or less, and no more than five years of gross receipts history, can elect to apply up to $500,000 of their R&D credit against payroll taxes rather than income taxes. This makes the credit valuable even for companies that have limited income tax liability.

The R&D tax credit is now permanent, and unused credits can be carried forward for up to 20 years. This gives construction companies certainty for long-term planning.

Take the Next Step on Your R&D Tax Credit

The R&D tax credit rewards the innovative work construction companies perform every day. Identifying qualifying activities and maintaining proper documentation takes effort, but the tax savings can be substantial. At James Moore, our construction tax professionals help clients uncover credits they never knew they qualified for. Contact a James Moore professional to discuss how the R&D tax credit can benefit your business.

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