Throughout the COVID-19 pandemic, nutraceuticals have seen an increase in business—largely because people are looking for more natural alternatives to improve their health. It’s also because nutraceuticals and home remedies are convenient; they can be delivered to your house without a doctor’s prescription.
The nutraceutical industry is experimental and constantly evolving to support its customers’ overall health and wellness; however, many in the industry are unaware that developing new or improved products or processes can result in R&D tax incentives that can provide significant savings.
Qualifying activities for R&D credit center on innovative, new, and enhanced product formulation and process manufacturing. They could also include making improvements to existing products, testing, receiving feedback, and reformulating the product until it meets its intended health-giving or medicinal use.
To help break down this complex topic, here’s a list of common questions companies have about the R&D credit.
What Is the R&D Tax Credit?
It’s a dollar-for-dollar tax savings that directly reduces a company’s tax liability. Available at both the federal and state level, there’s no limitation on the amount of expenses and credit that can be claimed each year for federal purposes and each of the eligible states have their own respective rules and qualification criteria.
If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years—or indefinitely for California R&D tax credits.
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.
New or small businesses may be eligible to apply the R&D tax credit against their payroll tax for up to five years starting in 2016.
For more information, including an overview of how to navigate the claims process, please see these additional resources:
How Much Could a Nutraceutical Company Save with R&D Tax Credits?
There are several factors that can impact tax savings. The amount of tax credit available depends on how many qualified costs a company incurs during a specific tax year. See below for details on qualified costs.
In general, a company has the ability to save 7%–10% of annual R&D costs for federal purposes. The savings could be even greater if that company has an income tax filing obligation in a state that also offers an R&D credit.
Which Activities Within the Nutraceutical Industry Qualify for the R&D Tax Credit?
Most nutraceutical companies are developing new or enhanced health and wellness formulas as well as the processes to manufacture the products.
There are activities within the following tasks that could qualify:
- New product development
- Therapeutic efficacy testing
- Reformulation of products
- Lab and functionality testing
- Experimentation with natural versus additive ingredients
- Functional enhancements and new applications for existing products
In addition, certain activities, performed by in-house employees or outside contractors could qualify for the R&D tax credit.
- Experimenting with adding patented nutraceuticals into food products
- Creating genetically engineered probiotics, complex proteins, and therapeutics
- Designing and developing green technology for manufacturability of nutraceuticals
- Experimenting with consumer DNA in the formulation of nutraceuticals
- Developing or improving efficacy of nutraceutical solutions
- Analyzing new raw materials for product development
- Improving the efficacy of the formulation
Eligible Job Functions
Whether you’re developing products that are new, different, or likely to perform well on shelves, certain job titles could be representative of potential R&D activity. This includes employees who are performing direct R&D, direct support of research and developers, and first-line supervision of R&D. All qualified activity must be performed within the United States.
Following are some examples:
- Food scientist
- Genetic engineer
- Lab technician
- Quality assurance specialist
- Product developer
- Process manufacturer or engineer
- Package manufacturer or engineer
What’s the Next Step to Apply for the R&D Credit?
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. That information can be used to develop an estimate of the credit benefit your company could receive as well as to identify other R&D-related tax planning opportunities so you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.
It's important to understand that your efforts don’t have to be successful to qualify for R&D tax credits. However, including or identifying expenses improperly can have consequences, such as IRS disallowance, penalties, and fines.
For a thorough overview of the claims process, read R&D Tax Credits: How to Navigate the Claims Process Step by Step.
We’re Here to Help
Each company’s goals, values, and resources are unique, which makes it 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 5 Misconceptions about R&D Tax Credits—and if Your Company Qualifies, or request a complimentary credit benefit estimate to see how much your company could save.
If you have any questions or would like assistance, please contact your Moss Adams professional.