In the past decade, Research and Development (“R&D”) tax credits utilized by U.S. companies have nearly tripled. These credits are available to an assortment of businesses and industries, but predominately are utilized by manufacturers and those in the information technology sector. R&D tax credits are a government incentivized credit to encourage growth and development in the U.S. and strengthen domestic investment. Companies in a wide range of industries, with readily increasing research expenses can be a potential candidate for these credits.
A company does not have to invent something revolutionary to qualify for the credit. Efforts to make products lighter, stronger, cheaper, more reliable, more economical, or making processes more versatile may qualify for the R&D tax credit. For example, many companies, especially in the manufacturing and food and beverage industries, may have needed to re-design or rethink their processes in the wake of COVID-19, and those activities may qualify for R&D tax credits. This investment of time, money, and resources is often overlooked by companies that are not consistently involved in fields with significant research and development activities; however, the credit can be an immediate source of cash or reduce current or future tax liabilities. If the R&D tax credit cannot be currently utilized due to net operating losses, it can also be carried forward for 20 years. A company can generally take a credit for all open tax years, which is generally the three prior years.
The R&D tax credit is not a deduction, rather, it is a dollar-for-dollar offset of federal income tax, and potentially payroll tax liabilities and even Alternative Minimum Tax (“AMT”), for U.S. companies that develop new, or improve existing, products and processes within the United States. In addition to the federal R&D tax credit, certain states also offer similar programs.
Without getting into the specific mechanics of how it is calculated, generally it is a 20% tax credit, and consists of the following qualified expenses related to research and development activities (1) in-house wages, (2) 65% of contract research expenses, (3) supplies, and (4) rent or lease of computer equipment. The net benefit is generally up to 8% of the company’s qualifying research and development costs.
You may be asking yourself, “how does something like this apply to my food and beverage company?” The fact is that there are various avenues for businesses in this sector to potentially take advantage of these credits, such as food product formulation, new or improved sanitization methods, ingredients and formulations, ERP software implementation for purchasing and shipping, packaging redesign and methods to increase shelf-life, production process changes and efficiencies, and testing to reduce costs and meet regulations, to name a few.
An example of one of these areas which could apply to R&D tax credits is within food packaging. With a rising demand for prepared foods, changes in packaging have been a growing area, both in supermarkets, restaurants, and the manufacturing and distribution supply chain. Consumer shopping patterns have changed dramatically over the past year because of the COVID-19 pandemic; however, this shift has been coming for some time. From grab-and-go options, in-home delivery, and even adding full-service restaurants in supermarkets, the need for packaging has become an important aspect to both safety and sanitation of the food that makes its way into peoples’ homes. Companies are looking to develop tamper-evident solutions, for example. Additionally, eco-friendly food packaging has become an even greater consideration, as environmental concerns continue to be a driver of change within the industry. By assessing the processes and product development that occurs within this area, companies may be able to reap the benefits of R&D tax credits that would otherwise go by the wayside.
There is a great amount of uncertainty within the food and beverage sector as impacts beyond the global pandemic continue to cause business and finance leaders to find new ways to save money, increase cash flow, and minimize taxes where possible. By utilizing R&D tax credits in your business, you can help achieve many of these benefits.
If you believe you may be eligible for R&D tax credits, or have any questions related to the program, SobelCo is here to help.
Chris Martin, Member of the Firm in the Accounting and Auditing Practice at SobelCo, has worked closely with mid-sized, privately-held businesses throughout his entire career. He adds value by assisting clients with their financial statement needs, providing strategic planning for their corporate and individual income taxes, and taking an active role in consulting on major financial decisions. Chris devotes a significant amount of his time specifically in SobelCo’s food and beverage practice where he manages financial statement audits, reviews, compilations, and income taxes for manufacturers, distributors, and supermarket owners in the tri-state area.
Doug Finkle, CPA, MST, is a Tax Director at SobelCo with over twenty years of experience in handling tax compliance for corporations (including consolidations), partnerships, S corporations and high net worth individuals as well as sharing his in-depth knowledge of tax laws and regulations, most particularly by leveraging his wide involvement with tax planning and developing tax minimization strategies for clients.
