How Construction Companies Can Save Millions on Their Taxes I Ep. 44



Taking Advantage of R&D Tax Credits with Smith Miller, CEO of Strategic Tax Solutions

About Smith Miller:

Smith is the CEO of Strategic Tax Solutions (STS). STS is a private accounting firm that specializes in the area of tax known as the Research and Development “R&D” Tax Credits.

They make the process of accessing R&D Tax Credit dollars straight forward, cost effective and risk free. At no cost, they review construction company tax returns and provide a cost savings estimate for your potential R&D Tax Credit savings. STS is exclusively dedicated to performing R&D Tax Credits.

Highlights Include: 

  • What are R&D tax credits and how construction companies qualify for them
  • The “Four-Part” test that you must pass to qualify 
  • How sub-contractors and general contractors can both benefit
  • How you can take advantage of the credit, even if you bid on a job and don’t get awarded the project
  • Why you should get your CPA involved in the process early on
  • STS’s 100% success rate

Learn More about STS and R&D Tax Credits:

Complete Transcript 

Eric Welcome to Construction Genius, and it is my pleasure to welcome to the show Smith Miller, the CEO of Strategic Tax Solutions. Now, Smith, as I introduce you, here is some of my audience might start cringing when we use the word tax. I know I always cringe when I think about how much I’ve got to give Uncle Sam this year. But you have good news for people when it comes to their taxes, specifically to construction companies. So tell us all about that. 

Smith The R&D tax credits have been around since 1981. Typical contractors and design-build contractors and subcontractors don’t believe that they qualify. And due to several reasons. One is. People conjure up in your head when you say R&D they think of white coats, bunnies, beakers and sterile environment. 

Eric So specifically, when we talk about our Indy, we’re talking about research and development. 

Smith Yes, research and development, tax credits. OK, so what this does is offsets. Reduce and or reduces. At a federal and state level, the tax liabilities for these corporations and it ultimately flows through to the shareholders or members of that entity. 

Eric OK, so we were talking off line about an example of a general contractor, design-build contractor that you have worked with that you have saved over half a million dollars in tax liability. So tell us about that specific contractor. 

Smith That specific contractor is is doing both brand new projects from the ground up and TIs also. Sometimes newer buildings, sometimes old buildings shored up before they can do the building. So there is a. It boils down to a four-part test. 

And if you satisfy this four-part test, which most contractors, general contractors, design, build, contractors and subcontractors qualify, and it goes like this at a high level, you must set out to improve a product or process. It must be technical in nature. There must be uncertainty on the onset. 

And you must go through an iterative process of trial and error to satisfy that hypothesis or answer your hypothesis and or get to your end result. Building the building or putting in an HVAC system that works efficiently. Or a structural engineer that’s successfully completed a job where they were they implemented their their structure and it and it works or they’re done. 

Eric OK, so. So let’s just go through those step by step. This is very important. Number one, they’re improving a product or a process. So I’m imagining if I’m doing a TI, there’s an existing building, I’m improving that building, and therefore I qualify for that. That aspect of the tax credit that satisfies that, that satisfies that that requirement. And there’s four requirements that you must satisfy. 

So the second one is that it is technical in nature.  And I know that you were saying when we were chatting earlier that one of the reasons people don’t take advantage of the tax credit is because they think of people in lab coats. But what you were saying is that the laboratory that we use is in our computers. Is that correct? 

Smith That is correct. Especially in the CAD department or drafting department and with engineers. 

Eric OK. So. So let’s just let’s just hit that then. So if if someone in your construction company is using a CAD program of some kind, doing some kind of design of test in technical in nature, then that qualifies. But that aspect of the tax credit. That is correct. OK. Now, the third one is that this is interesting. One, elimination of uncertainty. 

Tell me about that one. 

Smith Yes. So every project, a contractor design, build, contractor or a subcontractor takes on. There’s gonna be uncertainty even if they’ve done it a million times before. There’s gonna be uncertainty. There is uncertainty with every single project. 

Eric So let me interrupt you. Let’s say I bid a project and I win that project and then I give it off to my project manager and perhaps they do some design engineering or some project engineering on the current designs in order to improve those, in order to be able to build it more efficiently. Is that an example of elimination, of uncertainty? 

Smith That would be one example of the first you’ve just satisfied the first three. 

Eric  The first three. 

Smith Yeah. Well it’s a you’ve change a product or process. Yet you’re using something technical and now you’re satisfying or looking at or eliminating or reducing the uncertainty. 

Eric OK, so anytime my project manager does some value engineering on a on a project that I’m working on, then that satisfies those first three requirements in order to qualify for the tax credit. Yes. Okay. And then let’s talk about the fourth one. 

Smith So the process of experimentation. So to get two for four in order for a contractor or general contractor or subcontractor to get to their end result, they’re gonna go through an iterative process.

Eric So let’s say my project manager has done some value engineering. We take it out to the field. My foreman or my superintendent comes back and says, hey, that’s OK. But if we did it this way, it would be even better. And I do a little more work on that, design that would that qualify for the iterative in nature aspect? 

Smith Absolutely. And that and what you just played out there happens on a on a regular basis for every contractor and subcontractor out there. 

Eric Absolutely. Absolutely. Now. How is it that this tax credit works? What aspect of of the tax universe, it is looked at in terms of the savings. You could tell I’m not a CPA. 

Smith There are three components going into making up the amount of the credit. So there are the three components are the W-2 wages of the individuals that are conducting the qualifying activities, which we just describe satisfying that four part test. The second component would be supplies consumed during the process of OK. And the third component would be subcontractors or vendors that helped on a project to complete. So a typical design build contractor will hire subcontractors, if you will, or and or vendors to help them in areas that they have an expertise in. So we can the client and the general in this scenario is able to capture sixty five percent of what they pay out to that subcontractor. They capture sixty five percent of that cost goes into the makeup of making it the amount of the credit. The reason is that sixty five percent is because the subcontractor can also claim the credit. 

Eric So I’m a GC. I’ve got a project. A sub, some of that out to one of my project partners. They do the activities that are surrounding that four part test. And I get a credit as a result of that. Based on what I pay them?

Smith You’re eligible for the credit. Yes. 

Eric  Eligible. OK. You’re eligible. OK. Now, let me go back a little bit. You talked about the W-2. So you and I, both in Northern California, we know that the construction companies pay a lot of money for project managers, estimates is hundreds of thousands of dollars. And the tax credit is based on the qualifying tax credit is based on how much money you’re paying those highly paid technical workers. Is that correct? 

Smith That is one component. That is the largest component that goes into making up the amount of the credit or the tax savings that the client can benefit from. 

Eric OK. So then if I’m paying my PMS, let’s say I’m paying them, you know, one hundred to two hundred thousand dollars a year. I’ve got five or six PMS working in my organization. So, you know, I’m I’m getting up with all the benefits and everything like that. You know, I’m getting close to a mil easy. And then I think about all the projects that they’re working on that qualify under that four part test. That’s where I can really start hitting some home runs in terms of the tax credits. Is that correct? 

Smith That is correct. And it’s something that I like to share with contractors, 

There’s typically a large number of bids that go out and they don’t win all those bids. Yes. So when I when we go through the education process with the client. All that all those bids that they do and they don’t win. They really do win because all that four part test is being satisfied by the estimates as they’re going through that the engineers and project engineers and estimate hours are all working together. The CAD people are all working together to design this product, whatever it is. Building or improving a structure. 

Eric So I don’t even have to get a project in order to benefit from this tax credit. 

Smith That is correct. And this is one of the biggest bright spots that contractors love because of like, wait a minute. That’s not a loss and it’s not a loss. You were a that goes back goes toward that. Those moneys, those revenues, those W-2 wages that were paid out go towards setting off offsetting their tax liabilities at the federal and state level. 

Eric That’s beautiful. That’s beautiful. Why is it that contractors don’t take advantage of these R and D tax credits? 

Smith Well, I can’t speak for myself, but I can only speak for what I’ve been told by my clients. And right now I have this conversation. So the first thing I typically hear a lot of is what we didn’t think we qualified because we think of our indeed, we think of research and development as a sterile laboratory environment. 

They don’t understand that now. Like you pointed out earlier, the laboratory is now in your computer. That’s right. Now, calculators now. So that’s one of them. 

The other is also that they may have done research on the Internet. And as you know, there can be misinformation on the Internet. 

Eric No, no, there’s misinformation on the Internet. Yeah. I don’t believe it. I don’t believe it. 

Smith So that I think there’s a lot of fear that gets conjured up there. And also, when you first hear about this, Eric, when when I first told you about this, I remember you look at me like you’re crazy. Smith, this sounds too way too good to be [So I think it’s a combination. That’s what I’ve been told, that the combination of the three. So it’s an education process. 

Eric So. So do you find that CPA is pushed back on this a little bit or are they kind of skeptical as well? 

Smith So mostly CPAs are aware of it. A lot of them don’t want to go down the road from a liability standpoint. That’s where we come in. We’re a value add. This is all we do. We stay in our lane. We don’t do any other we’re an inch wide and a mile deep. And that’s all we do, period. And we do it. We do it very well. 

Eric So what? What liability do you take on when you work with a client? In light of, you know, finding out if they qualify and all those kinds of things, how does that work? 

Smith  So in our fees, which we typically charge a third of what we generate, we provide our clients with audit defense. So we own this. We own the R&D component of it. 

Eric So in other words, you have skin in the game as well. 

Smith Absolutely. And as of today and we we have never had a disallowance at the federal or state level. And we’ve been to appeals twice and won. 

Eric OK. So how many of these have you done over the years? 

Smith How many of these audits? How many of these client projects? Yeah, how many of these projects? Hundreds. We’ve never had a disallowance. 

Eric  OK. So did the feds or the state have never come back to you and said, no, you can’t have this. 

Smith Yeah, well, they’ve come back and said that. But we’ve. We’d fight it and we share our case with them. And that’s where the devil is in the details. You have to be able to substantiate it. And that’s where we come in and we document everything that we do to substantiate the claim. 

Eric OK. Now, the reason why I just went into all that detail was not so that, you know, we could just pitch Smith here, but it’s so that the audience could understand that there is there is a safe way of going about this process and potentially saving millions of dollars in terms of your tax liability. 

Eric What advice do you have for my audience, whether they’re general contractors or subcontractors? What advice do you have? What actions should they take? 

Smith Well, I would advise them to reach out to their CPA and have a discussion with them and or reach out to us. We do a. We provide our client or prospects with complimentary analysis, which requires us getting some tax returns and gross receipts. We plug it into a model, take a snapshot of the past three years and share that with them. And if they want to engage us, they can engage us. So it’s a simple process. It doesn’t take a whole lot of time. It’s something that everybody should do to find out. Is it. Is it bigger than a breadbox? Or is it smaller than a breadbox? 

Eric So this is the key here. You’ve got to reach out your CPA, get them involved, and then you’ve got to reach out to someone who does the kind of work that Smith does and what Smith does. It’s an inch wide and a mile deep. And so I’m going to link to your Web site in the show notes just so that people see it. And obviously, this is a we’re we’re sharing this information with you guys, not just so that you can go to Smith’s Web site or something like that, but so that you could be aware of this R&D tax credit and understand that as a construction contractor, whether you’re a sub or a GC, it could have a massive positive impact on your tax liability and save you a bunch of money. 

Any closing words that you’d like to leave us here with? 

Smith No, I just I encourage like I said, this is an educational process. 

I encourage everybody to look into it, even if you don’t think you qualify. Check it out. It’ll be it will not be a waste of time. Even if you don’t qualify, it’s not a waste of your time. 

Eric Awesome. Awesome. Well, I really, really appreciate you joining me here today. Smith, I really appreciate you explaining this. And like I said, I’ll leave a link in the show notes to your website. And I appreciate you joining me here today. 

Smith Thank you.