The R&D Tax Credit for Breweries in 2024
UPDATE: Starting in the 2022 tax year, the way you file and claim the R&D Tax Credit has changed. Expenses previously deductible must now be capitalized and amortized over specific periods, impacting tax planning strategies. It’s important for businesses to understand these changes for accurate tax planning. We suggest reviewing them with your tax advisor to see how they impact your business.
Imagine accessing a “secret cash stash” to help expand your brewery.
Like investing in that new POS system you’ve been eyeing, experimenting with new brews, or purchasing new equipment for your business? That would be a dream come true, huh?
Well, there might actually be a way to achieve this without a secret stash, and it’s called: the R&D Tax Credit.
It’s been around since 1981, but it’s one of the most overlooked and lucrative tax credits in the US that breweries and restaurants qualify for.
In this blog post, we’re discussing what the R&D Tax Credit is, why it’s suitable for your breweries, and what you need to qualify for it.
Let’s dive in.
What is the R&D Tax Credit?
The Research and Development (R&D) Tax Credit is a tax credit that supports companies’ growth by offsetting some of their costs of research and development.
In a nutshell, the IRS will subsidize certain activities in your brewery that qualify as R&D to incentivize innovation and encourage growth investment.
Therefore, the R&D Tax Credit can help you increase cash flow and maximize savings during hard and uncertain economic times.
While it’s often overlooked by many breweries, R&D takes place during many different phases of your business,
Each activity has a small element of qualified R&D expense that can add up to big savings.
“Less than 3 in 10 businesses who qualify for the credit actually claim it, while virtually every large company makes the claim.”
Why is the R&D Tax Credit Good for a Brewery?
If you’re not convinced R&D tax credit is worth your effort, here are just a few of the benefits that you can enjoy from claiming the credit:
- It provides an immediate source of cash
- It can create a significant reduction of current and future years’ federal and state tax liabilities
- It is an actual dollar-for-dollar credit against taxes owed or taxes paid.
- More than $7.5 billion in federal R&D tax credits alone are given out annually
- A business can take the credit for all open tax years (generally the last three or four years plus the current year). Additional years may be available if the taxpayer is in a net operating loss or alternative minimum tax position.
- Tax credits can be carried forward up to 20 years
- In addition to the federal R&D tax credit, many state R&D tax credits are available.
And did we mention it’s free cash?
What Tasks Qualify Under the R&D Tax Credit?
It’s likely that your brewery is already doing qualified R&D activities in everyday jobs without even realizing it.
For an activity to be considered a QRA (Qualified Research Activity), it must rely on chemistry, physics, and engineering; it must also involve testing and evaluating procedures.
Here are a few examples of brewery tasks that could qualify for the R&D Tax Credit:
- Experimenting with different ways to naturally carbonate beer bottles for better taste.
- Developing eco-friendly methods for filtering beer and treating wastewater.
- Trying out new hops and brewing techniques to create unique flavors.
- Finding ways to make brewery operations more flexible and efficient as production grows.
- Designing packaging that keeps beer fresh for longer on store shelves.
- Tweaking beer recipes and fermentation methods to improve taste and quality.
- Testing different ingredient combinations to create new beer flavors.
- Making sample batches of new beers to see how they turn out.
- Checking beer quality to make sure it meets standards.
- Testing beer samples for purity and consistency.
How Much Can Your Brewery Save from the R&D Tax Credit?
How much your brewery can save on taxes with R&D Tax Credit comes down to the activities performed and the size of your business.
The federal credit amount ranges from 5-10% of your qualifying R&D expenses, in any given year. And you can claim even more through state R&D tax credits.
So, let’s say you spend $200,000 on research activities in 2023, you will be able to claim up to $20,000, dollar for dollar against your federal taxes.
We found this useful calculator to help.
In general, you can expect to save tens of thousands, if not hundreds of thousands of dollars, depending on the number of expenses that qualify for the credit.
New businesses can also claim an R&D tax credit of up to $250,000 per year against their payroll taxes, as long as they make less than $5M in revenue and have been in business less than 5 years.
We recommend working with your experienced brewery accountant to determine how much you can save overall in your business.
What Documentation Do You Need?
While claiming the R&D Tax Credit isn’t rocket science, it’s not as simple as checking boxes, either. There are due diligence steps that you’ll need to take and document along the way to qualify for the credit.
The first step in doing this right is getting the correct documents in order, which include the following:
- Detailed project notes containing test results, recipe adjustments, marketing materials, and any documentation outlining processes relevant to your beer development.
- Records of timesheets indicating meeting times, payroll details, work schedules, and any other activities eligible for R&D tax credits within your brewery.
- Invoices and receipts from external contractors engaged in research or development activities specific to brewing.
- Payroll records for employees or managers actively participating in R&D endeavors within the brewery.
- General ledger reports delineating expenses for ingredients, equipment, and other costs associated with R&D, distinguishing between qualifying and non-qualifying expenditures for brewery operations.
What you can’t do is estimate your expenses – it’s a bad practice that will end up costing you more in the long run.
So, What Now?
We can agree on two things; as a brewery, taking advantage of the R&D Tax Credit is in your best interest. And two, it will take a lot of work to achieve that.
Instead of using a crazy amount of time trying to figure out what to do, you can outsource it to us. We will help you with the following:
- Identify what activities in your business could qualify for R&D tax credits
- Do a comprehensive review of these activities to maximize your claim
- Ensure that you are taking full advantage of the tax savings
We’ve successfully done this for many clients and already have a working procedure.
To start, simply head over to our Getting Started page and fill in the form, or book an introductory call using the calendar below.
Until next time!
