By constantly generating new and improved products, wineries, breweries, cideries, and distilleries are continually refining their manufacturing and distribution techniques and developing new packaging processes. These activities can qualify for the research and development (R&D) tax credit, but many alcoholic beverage producers aren’t using the credit because of misconceptions about who can claim it and for what kind of work—even though it could save them up to 10 percent of annual R&D costs for federal purposes and much more when state credits are factored in.
The R&D Tax Credit
The R&D tax credit has the potential to offset taxable income, which can reduce a company’s tax burden in the years that qualified activities occur. This can make more money available for businesses to invest in other objectives, such as making improvements to their manufacturing lines, hiring additional employees, or creating another generation of innovative products and processes. Depending on where the R&D activities are performed, alcoholic beverage producers may also be able to claim R&D tax credits at both the state and federal levels. Thirty-nine states currently offer R&D tax credits separate from the federal incentives.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the federal R&D credit permanent and included expansions to the application of the credit that made it more appealing and available to producers of alcoholic beverages. For eligible companies, the R&D tax credit may now be applied against the alternative minimum tax, payroll tax, and income tax. This eliminates some of the usability issues that limited companies from taking full advantage of the R&D tax credits in the past.
The amount of R&D tax credit a company can claim depends on several factors, including the amount of expenses incurred for R&D, research potentially funded by others, and the increase in R&D expenses over time. For example, a company with $500,000 of eligible expenses—let’s say, internal engineering costs—could have a federal tax credit of $50,000, while a company with more than $2.5 million in eligible expenses could have a federal tax credit of $250,000.
Qualifying R&D Expenses
R&D isn’t limited to the work of scientists or dedicated laboratories. According to the Internal Revenue Service’s code definition, qualifying R&D expenses and activities may be found wherever experimentation occurs. This means most alcoholic beverage producers are already performing qualifying R&D activities in their test kitchens, breweries, wineries, and distilleries—or right on their production floors.
Examples of activities that may be eligible for the R&D tax credit include developing, designing, testing, or investing in the following:
- Fermentation and distillation processes
- Custom manufacturing equipment
- Automated processes
- Bottling and packaging processes
- Filtration or straining methodologies
- Product formulations
- Consistency and shelf life
- Prototype batches
Talk to your accountant to learn how you can apply for the R&D tax credit. He or she will be able to help you determine which of your expenses are eligible for the credit and which ones aren’t, and how you can best reduce your tax burden by using it.
Companies that haven’t previously taken advantage of the R&D tax credit may look back to all open tax years—typically three to four years—to claim any missed opportunities. If a company doesn’t currently have taxable income or is otherwise limited in how much tax credit it can use, the federal tax credit can be carried forward for 20 years or, potentially, applied to offset the company’s federal payroll tax. State credits may also be carried forward but for different lengths of time (as determined by each state).
It doesn’t matter if you’re a winery, brewery, cidery, or distillery—if your company is improving its products and processes, the R&D tax credit adds up to money you can reinvest in your business rather than pay out to the IRS or state governments.
Brian Short has been providing tax and consulting services for small to midsize companies since 2005. He helps middle-market companies claim the R&D tax credit and assists clients with federal and state examinations. He can be reached at (503) 478-2302 or at email@example.com.