Getting (Tax) Credit for Beer Research and Brewing Development

David Natan – ACB Guest Contributor, Craft Beer Lover & Professional CPA

Brewers are often passionate about their vocation, motivating many of them to leave more traditional jobs (yes, I’m talking to you!) and pursue a career as a brewer. With that appetite for a new challenge comes an investment in time and resources, meant to improve processes or develop new products.

But what sometimes gets lost amid the hoopla of the career change and lightbulb ideas are the tax savings that may exist just by following through on their brew brainstorms. In fact, many breweries overlook the potential tax savings opportunities offered specifically through the Research & Development (R&D) tax credit. 

Let’s cut to the chase – the R&D tax credit is a dollar-for-dollar benefit against tax, designed to stimulate efforts aimed at the advancement of U.S. companies. 

The credit is primarily a federal credit, although certain states offer their own versions as well.  Determining research and development is fairly complex, involving several different elections, but the credit is primarily derived from an allocation of employee time, consultant expense, and related research and development supplies.

Recent legislation has made the credit even more attractive, as its application is no longer limited to AMT (Alternative Minimum Tax), and it offers a new potential payroll tax credit offset opportunity.

And here’s the cherry on the sundae – the R&D tax credit is now permanent. 

Since January 2016, small businesses with $50 million or less in gross receipts can claim the credit against the AMT.  This change has benefited a significant number of closely held businesses (such as breweries) and their shareholders who previously had to defer some or all use of their credit due to the prior AMT limitations. 

In addition, small businesses with $5 million or less in gross receipts can now offset the credit-against-payroll tax liability, although this is capped at $250,000 for up to five years.  

Sounds good so far, right?  But qualifying for the R&D tax credit is not exactly the proverbial piece of cake.

Brewers must show that their research and development work is technical in nature, has a permitted purpose, and demonstrates a process of experimentation. 

Based on these criteria, some examples of R&D activities within the brewery 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 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;
• Developing new or improved product formulations or improved ingredient mixing methods;
• Developing new or improved prototype batches or improved preservatives;
• Testing of new or improved designs to ensure shelf life or longevity; and
• Testing of product ingredient combinations relative to new flavors or enhancements.

 

Brewers take note.  There are many complexities to this law and its application to your business. To support qualified research, you must maintain documentation, either electronically or on paper. 

Logs, meeting minutes, email communications, technical reports and patent applications can all be used to support the R&D credit.

Still, between information provided by taxpayers (or lack thereof) and the standards set by the IRS, distribution of the R&D tax credit can be challenging, as seen in numerous court cases over the years. 

By keeping detailed research and development activity records, as well as consulting with a CPA firm that understands the credit, brewers can balance their passion with business pragmatism, and ensure continued success.   

 

David Natan, CPA, MST, CVA is a partner and Certified Valuation Analyst at Newburg & Company, Certified Public Accountants . He can be reached at [email protected]