Companies in the food and beverage industries are continually developing new or improved products to meet ever-changing trends in consumer demand. These companies are also investing in or evaluating their processing systems and equipment to identify opportunities to reduce cost, improve product quality, or increase production.
More recently, the food and beverage industries has been at the forefront of innovation to improve employee and product safety in response to the COVID-19 pandemic.
The innovation and development activity across the food and beverage industries make it a natural fit for R&D credits. The R&D credit can help improve cash flow, enabling businesses to invest in other objectives—such as making improvements to their manufacturing lines, hiring or retaining employees, or developing the next line of innovative products and processes.
But first, what is the R&D tax credit?
R&D credits apply directly to offset a company’s tax liability and have the potential to reduce tax liability to $0 for eligible small businesses. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years.
In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes. The R&D credit is available both at the federal and state level.
To help break down this complex topic, here’s a list of answers to common questions food and beverage companies have about the R&D credit.
How much can a company save with R&D tax credits?
The amount of R&D tax credit a company can claim depends on several factors, but it’s primarily based on the amount of expenses that are determined to be eligible for the credit and not the revenue generated by a company.
Generally, the amount of federal credit is approximately 5%–10% of a company’s development expenses during a given year. This figure can be much higher when state credits are factored in.
What does the R&D credit apply to?
There are two main types of activities that may qualify for the R&D credit:
- Developing new or improved products
- Developing new or improved processes
The most common qualified R&D activities for food and beverage are generally related to product development, though investment in new or improved equipment or processes may also generate significant credits to help recoup some of those investment costs.
With food safety, quality, and sustainability being top concerns for the industries, many food and beverage companies are investing in development of new equipment and systems for processing, packaging, and storing product inventory. The costs related to new or upgraded equipment, as well as the labor and materials dedicated to process or product development projects, could qualify for the R&D credit.
What specific activities within the food and beverage industries qualify for the R&D credit?
Here are some examples of R&D activities that have been claimed for companies in the food and beverage industries.
- Development of new or improved products to stay current with trends in consumer demand and preferences—for example, development of organic, gluten-free, or easy-to-prepare meals
- Development of new product formulas to reduce costs, improve shelf-life, or mitigate ingredient sourcing issues
- Installation of automated or more efficient processing and packaging equipment or systems
- Implementation of ERP software to integrate production, purchasing, and shipping systems
- Development of new or improved processing methods to reduce waste or improve product quality
- Implementation of new or improved sanitization or washing systems and methods for improved food safety and quality
- Development of new packaging materials and methods to increase shelf-life or optimize storage space
What if R&D tax credit opportunities were missed in prior years?
Companies that haven’t previously claimed the R&D tax credit may amend their previously filed tax returns for up to three years to claim any missed opportunities. Some companies with a history of net operating losses may also be able to go back into even earlier years to calculate R&D credits.
The credits from loss years will carryforward for up to 20 years until the company has enough tax liability to fully utilize the credits.
To benefit from these credits, what’s the next step?
If you think your company may qualify for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities. Your tax professional can use this information to develop an estimate of the credit benefit your company could receive, as well as identify other R&D-related tax planning opportunities.
Then, you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.
We’re Here to Help
Each company’s goals, values, and resources are unique, so it’s important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.
With recent increased IRS scrutiny around R&D credits, it’s crucial to understand what’s necessary to substantiate a credit claim.
To learn more about R&D tax credits, see Five Misconceptions about R&D Tax Credits—and if Your Company Qualifies, or request a credit benefit estimate to see how much your company could save.
For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: