The R&D Tax Credit is a tax incentive that can be applied as a dollar-for-dollar offset against a company’s tax liability if they engage in activities related to the design and development of a product, process, formula, invention, software, or technique within the United States. Additionally, start-up businesses with less than $5 million in gross receipts in the current taxable year and no gross receipts prior to the fifth previous taxable year (e.g., for 2023, the company must not have gross receipts prior to tax year 2019) would be considered a qualified small business (“QSB”) and can use the credit to offset up to $250,000 of their payroll tax liability, with an increase to $500,000 for tax years beginning after December 31, 2022.
For businesses within the Food & Beverage Industry, the most common qualified R&D activities are related to the development of new products as well as improvements to manufacturing processes. Some examples of qualifying activities include, but are not limited to, the following:
- Development of improved fermentation methods;
- Improvement of the formula of a product to extend shelf-life;
- Design of new product formulations to achieve specific technical parameters;
- Improvement of a manufacturing process to reduce waste and improve efficiency; and
- Design of improved packaging solutions, such as environmentally friendly packaging.
While reviewing your company’s activities, it is important to keep in mind the specific exclusions outlined by the IRS, such as “taste.” This exclusion would apply to activities performed to develop a product to achieve a subjective measurement of taste by consumers or employees. Performing research and development to determine which product or ingredients simply taste best to a consumer would not be considered qualifying activity. This concept of exclusion also applies to the look/feel of the product and/or product packaging.
If you believe your Food & Beverage business is potentially qualified for the R&D Credit, the following expenses may be taken to calculate your credit benefit:
Supplies used in the conduct of qualified research may be taken to calculate the credit if the supplies are used or consumed during the R&D efforts, with exclusions for land or improvements to land and property of a character subject to the allowance for depreciation. Under these exclusions, equipment or expenses incurred in the building of new manufacturing sites, for example, are ineligible for the credit.
However, any prototypes developed or raw materials consumed during the creation of a new product or testing of a manufacturing process may be eligible for the credit.
Any payments made to third-party contractors, 1099 or invoiced, for the performance of qualified research on behalf of the taxpayer may be eligible for the credit. For example, if your company is paying for outside testing services, these expenses may be eligible.
It is important for your company to maintain supporting documentation for new or improved developments your company undertakes each year. This documentation includes, but is not limited to, the following:
- Internal emails discussing new or improved developments;
- Design Documents and revisions for manufacturing process improvements;
- Logs detailing each phase or the development process (original concept, alternatives considered, testing, changes made, results of final product);
- Product evaluations/recommendations;
- Development team meeting minutes or notes;
- Progress reports; and
- PowerPoint Presentations.
If you believe your company may qualify for the R&D Tax Credit based on the above examples, it’s important to review your company’s unique circumstances with a R&D Tax Credit professional to determine whether an R&D Study is worth pursuing for your business. Withum provides a no-obligation complimentary assessment where your eligibility for the credit will be determined, and an estimated credit figure is provided.