Craft breweries and distilleries are continuously reengineering their manufacturing and distribution practices and developing new packaging methods. Unbeknownst to many in the industry, these activities could save them money and maximize their cash flows.
These activities may qualify for the Research and Development (R&D) tax credit, which can be used to offset tax liabilities; this can inevitably increase cash reserves that can be reinvested back into the operations of many craft breweries and distilleries, such as expanding production capacity, hiring new employees, creating another line of innovative beverages or purchasing new equipment.
What is the Research and Development Tax Credit?
The Research and Development tax credit (R&D tax credit) is a tax credit offered by the federal government that can save many craft breweries and distilleries up to 10% of annual R&D costs for federal tax purposes (and often times more) after considering the effect of state credits.
During the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the R&D tax credit become permanent and more accessible to craft breweries and distilleries. As a result, small and start-up craft breweries and distilleries with no income tax liability can now use the R&D tax credit to offset their payroll tax.
At some point between raw material acquisition and final product packaging, many craft breweries and distilleries are already executing research and development activities in their day-to-day operations.
However, many craft breweries and distilleries are unaware of the benefits of the R&D tax credit, largely due to common misconceptions about its application and benefits. I’ve outlined the three most pervasive myths among the craft brewery and distillery industry, as well as the reasons why they shouldn’t be believed.
Myth #1: My brewery or distillery isn’t big enough or profitable enough to qualify for the R&D tax credit.
Why it’s not true: The R&D tax credit can be carried forward for 20 years to be applied against future profits, or it can potentially be used against payroll tax liabilities, so it can benefit both start-ups and large entities.
Myth #2: The R&D tax credit is only available to high-tech businesses for technology advancements, new inventions or revolutionary breakthroughs.
Why it’s not true: R&D tax credits are available to those that attempt something technically challenging. In fact, businesses may not even have to succeed in the experiments to qualify.
Craft breweries and distilleries can be eligible for the R&D tax credit if they conduct qualified activities or spend for qualified expenses. Examples of qualifying activities that may make a brewery or distillery eligible for the R&D tax credit include:
- Developing new or improved product formulations
- Craft brewing or bottling equipment development
- Developing new or improved keg-filling or treatment techniques
- Testing product designs to ensure shelf life
- Developing new or improved ingredient processing techniques
- Developing new or improved filtration methodologies
- Developing ingredient-mixing methodologies
- Developing new or improved preservative chemicals
- Testing product ingredient mixtures for desired flavor
- Developing new or improved processes for bottling or canning
- Developing new or improved water recycling processes
- Developing yeast strains or fermentation processes
- Hopping techniques or hop varieties development
Costs that occur within the above qualifying activities are known as qualifying research expenses. Three types of expenses can be claimed:
- Salaries for those employees who are directly involved in qualifying research activities and first-level research supervision
- Supplies for developing prototype batches
- The cost of third party contracted research
Myth #3: The efforts involved in claiming the R&D tax credit are greater than the benefit.
Why it’s not true: Although documentation requirements may seem burdensome, many documents that are used in the calculation of the R&D tax credit are already maintained by many businesses.
The maximum benefit an eligible craft brewery or distillery can claim against payroll taxes each year under the PATH Act is $250,000.
In order to claim the R&D tax credit against payroll taxes, an eligible craft brewery or distillery must calculate and show the R&D tax credit on the most recent federal income tax return with the portion of the credit identified and elected to be applied to offset payroll taxes when the return is filed.
The amount of the R&D tax credit to be applied to offset payroll taxes is then available on a quarterly basis in the first calendar quarter after a craft brewery or distillery files its federal income tax return. However, the R&D tax credit will be applied against the payroll tax on the quarterly return, not when semi-weekly or monthly deposits are made.
If the amount of the R&D tax credit to be applied toward payroll taxes exceeds the payroll taxes in a given quarter, then the excess will be carried forward to the next calendar quarter.
Moving Forward to Maximize R&D Tax Credits for Craft Breweries and Distilleries
Craft breweries and distilleries can not only benefit from the R&D tax credit in their future activities, but those that have not previously applied the R&D tax credit to their businesses can amend returns.
Every craft brewery and distillery is unique, and each has different needs. The best way to effectively position your craft brewery or distillery with the benefits of the R&D tax credit is to partner with a tax advisor who understands your industry and tax law.
For more information or for insight that’s specific to your business, connect with a Warren Averett advisor.