Newburg | CPA Tax Brief (01/20/2022)
Improve Your Brewery or Distillery Cash Flow with the R&D Tax Credit
by: David Natan, CPA, MST, CVA
Brewery and distillery entrepreneurs have faced many obstacles over the last few years, navigating such challenges as pandemic-driven shutdowns, taproom spacing, stimulus complexities and supply chain snags. Newburg CPA is dedicated to advising and assisting our brewery business clients with tax planning and compliance strategies. One of the most important to their survival and growth amongst all of this is managing cash flow. One key cash improvement opportunity that breweries and distilleries often overlook is the potential tax savings alternatives available with the R&D tax credit. As most breweries invest resources and time towards improving processes and developing new products, the R&D tax credit could be a material driver of improved cash flow and offer up some significant relief.
The R&D credit is now a permanent incentive that embraces innovation. The credit provides a dollar‐for‐dollar benefit‐against‐tax designed to stimulate efforts aimed at the advancement of U.S. companies. While it is primarily a federal credit, certain states offer their own version as well. Computation of the R&D tax credit is fairly complex and entails several different calculations along with an organized approach to tracking those expenses that qualify. The credit is primarily derived from money already spent that you have incurred for your employee’s time, subcontractor expenses, and related R&D supplies and materials.
The key to maximizing the benefits of this credit is identifying those projects that qualify and working with your internal and external accounting team to capture those qualifying expenses properly. The ultimate credit could be anywhere from 6% to 15% of the qualifying expenses depending on the methods selected and how many years you have taken the credit. Additionally, certain small businesses ($5 million or less in gross receipts) will have the ability to offset the credit‐against‐payroll tax liability (capped at $250,000 for up to five years).
The activities performed by brewers and distillers must meet the following criteria in order to qualify for the R&D credit:
- Technical in Nature: To qualify, research and development activity must rely on the principles of engineering, physics, biology, or computer science.
- Permitted purpose: Contrary to popular belief, R&D does not pertain exclusively to new products. Taxpayers can reap the benefits of R&D as long as they are working on projects undertaken for the development of a new or improved aspect of their business. Processes, functions, products, quality increases, and substantial cost reductions all fall under the umbrella of permitted purposes.
- Process of Experimentation: Qualified research involves an element of trial and error. The brewery or distillery process of experimentation must be designed to evaluate alternatives to achieve a result where the potential to achieve that result is initially uncertain. Measures that are taken to produce a hypothesis and test it are noted by the IRS when deciphering which research and development activities are entitled to the R&D credit.
Some examples of R&D Activities within the Brewing and Distillery Industry include:
- Adding new equipment pertaining to process improvement or new bottling/brewing equipment
- Developing new or improved hopping techniques or varieties of hops
- Developing new or improved yeast strains or fermentation processes
- Developing new seasonal beers and validation of new recipe formulations
- Developing new or improved bottling and canning processes
- Developing new or improved bottle designs (including cans/crowns, etc.)
- Developing new or improved keg filling techniques, water recycling, or waste management
- Experimenting with new brewery or distilling techniques
- Developing new or improved product formulations or improved ingredient mixing methods
- Developing new or improved prototype batches or improved preservatives
- New or improved packaging designs to ensure shelf life or longevity and bottle conditioning
- Testing of product ingredient combinations relative to new flavors or enhancements
- Quality assurance testing
To support qualified research, brewers and distillers should integrate some form of tracking in having their employees or subtractors submit time tied to the qualified projects either weekly, monthly or quarterly. Keeping detailed records of research and development activities and consulting with a CPA firm that understands the credit can prevent future headaches and maximize your credit opportunity.
Please feel free to contact us directly with any questions.
Newburg CPA, a Boston-based accounting firm can assist you. Contact us if you have questions.