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Tax Court Sides with Construction Firm in Research Credit Decision

On May 10, 2023, the Tax Court denied a motion for summary judgment from the Internal Revenue Service (IRS) against a construction firm claiming the Research and Development (R&D) tax credit (‘the credit’).

The taxpayer Harper, a design-builder and general contractor, claimed multiple years of R&D tax credits that the IRS denied upon review. The case proceeded to the tax court for the final determination of credits the company can claim. In denying the construction firm the R&D tax credit, the IRS asserted Harper did not satisfy the required four-part test needed to properly claim the credit. Specifically, the IRS claimed the construction firm did not have a qualified business component. As required under Section 41 of the Internal Revenue Code, the business component test requires that a taxpayer intends to discover information to be useful in the development of a new or improved business component of the taxpayer, which can be any product, process, computer software, technique, formula, or invention.

The IRS put forth several arguments as to why the construction firm’s designs and drawings failed the business component test. The tax court repeatedly rejected the IRS’ arguments, stating that by designing its clients’ buildings and structures, the taxpayer has conducted research that satisfies the business component test.

The court’s opinion validates design firms’ technical work product as being the technical activity Congress sought to encourage when creating the R&D tax credit and as good candidates for the credit today.

Stay tuned for the full article and case write-up soon!

If you have any questions, reach out to one of our tax professionals today.

For the full US Tax Court Memo, please click here.



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