Mechanical, Electrical, and Plumbing (MEP) Research & Development Tax Credit Study

How can MEP contractors qualify for the credit?

The R&D tax credit (officially “Credit for Increasing Research Activities”) is a dollar-for-dollar reduction to your tax liability and can amount to large savings, not just this year, but retroactively as well. Despite being a huge benefit to Mechanical Electrical and Plumbing (MEP) contractors around the country, the credit it is often overlooked by both big and small companies. From pre-bid meetings and concept development to completing the final design and fabrication, there are qualified activities throughout the MEP design and development process.

The Calvetti Ferguson R&D tax credit specialists stay current with relevant IRS whitepapers, regulations, and case law so that your study is well-supported and accurate. This accounting and legal knowledge coupled with extensive experience working with mechanical, electrical, plumbing, engineering, manufacturing, and product development companies gives Calvetti Ferguson the expertise required to assist any MEP company with their R&D credit claim.

The internal revenue code, section 41, outlines the requirements for the R&D credit, however, the high-level requirements for an activity to qualify can be summarized by the “four-part test” as explained in the right column.

If your activities satisfy this four-part test, the associated wages, supply costs, and/or third-party contractor expenses could qualify towards the tax credit. We often see the credit amount to 10% of those qualified expenses.

MEP company case study

In 2020, Calvetti Ferguson completed a 2019 R&D tax credit study for a MEP company in Texas. The company had $7M in gross receipts and $2M in payroll during tax year 2019. Over the course of the study year, the company had approximately $850,000 in qualified wages associated with a wide variety of qualified activities.

 

As a result of the R&D study, the company saved nearly $60,000 in federal income tax, and $35,000 in Texas Franchise Tax.

Another MEP company case study

Calvetti Ferguson performed an R&D tax credit study to review activities and expenses of a company during tax years 2015-2018. As a result, Calvetti Ferguson assisted the company in receiving over $200,000 in federal tax credits.

During the study period, the company designed and manufactured MEP systems for new or existing facilities. This qualified business had annual revenues averaging between $3 to $5 million, employed between 30-45 employees, and averaged $1.5 million in payroll.

Qualified activities example:

If a CAD designer ($230,000 in 2019 wages) spent the entirety of 2019 evaluating and designing new or improved MEP systems through the use of AutoCAD software to achieve the reliability, performance, functionality and quality required to meet project specifications, the tax credit for their development efforts could amount to $23,000.

 

All employees involved in the development efforts associated with the development of new or improved MEP systems are eligible for the credit. From meetings with Customers to discuss the specifications and requirements of their product to testing the materials identified in the design, a variety of activities and expenses associated with the development efforts can be taken via the R&D tax credit.

While the scenario highlights the benefit attributable to the activities of one employee, an R&D study evaluates the entire company’s operations, often resulting in hundreds of thousands in tax-reducing benefits. Our study process is unobtrusive and thorough to ensure you get the credit you deserve, while always staying within the letter of the law.

Commonly qualified activities:

  • Utilize Building Information Modeling (“BIM”) to design new or improved MEP systems
  • Designing new mechanical system using AutoCAD (“Computer-Aided Design”)
  • Designing new MEP systems to achieve current Leadership in Energy and Environmental Design (“LEED”) specifications/regulations
  • HVAC engineering/design
  • Development of manufacturing processes associated with new product fabrication and assembly
  • Adjustments to current manufacturing processes to improve performance (Speed, precision, and labor required)
  • Material and component selection to meet reliability and performance specifications of each system

Four part test:

    • Technological in nature: Development must rely on the principles of hard science (mechanical/ electrical/industrial engineering, physics, biology, chemistry, etc.).
    • Permitted purpose: Must develop a new or improved product, manufacturing/assembly process, formula, invention, software, or technique for the purpose of performance, functionality, quality, or reliability.
    • Eliminate uncertainty: During the development of the “business component”, you must encounter uncertainty regarding the final design, methodology of achieving the desired outcome, or capability of achieving the desired outcome.
    • Process of experimentation: To overcome the uncertainty, you must evaluate one or more alternatives in a systematic way. often times this is done via systematic trial and error, modeling, simulation, and/or software (such as SolidWorks, AutoCAD, etc).

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Calvetti Ferguson works with mid-market companies, nonprofit organizations, and high net worth individuals across the country. Regardless of the complexity of the compliance, assurance, advisory or accounting need, our team stands ready to assist you. Please complete the form below, and we will follow up with you shortly.