Certain research expenses can help your food or beverage company save on taxes.
Companies operating in the food and beverage industry are constantly facing increased costs in raw materials, fuel, and regulatory changes while trying to keep pricing competitive and gain market share. Rising costs can be related to research and development (R&D), which include developing new products related to food safety, reducing costs, natural ingredients, dietary guidelines, and sustainable resources.
Luckily, federal and state governments offer R&D tax credits to reduce some of these expenses. The credit allows companies to receive tax breaks on costs associated with technological research performed in the United States. These costs do not have to be the direct cause of a new product or process, but rather activities they already perform.
Activities eligible for R&D credits
Activities that may qualify could fall into numerous categories including food, processes, packaging, and sustainability. A few examples are:
- Improving taste, texture, or nutritional content of food product formulations
- Developing techniques that will reduce costs and/or improve product consistency
- Improving machinery and equipment to ensure safe handling of food
- Create new packaging to improve shelf life, durability, and/or product integrity
- Switching to a more environmental friendly packaging
- Costs associated with being more energy efficient
- Creating new methods for minimizing contamination, scrap, waste, and spoilage
The credits can be as much as 20 percent of qualified research expenses, which include, but are not limited to, wages, supplies, and contract expenses. Remember, the R&D credit is not a deduction against income, but rather a dollar-for-dollar credit against taxes owed or taxes paid.
There are changes to the tax credits under the new tax law. Prior to the Tax Cuts and Jobs Act (TCJA), the corporate AMT tax rate was 20 percent, regardless of credits or certain deductions. Post-TCJA, AMT tax is eliminated and C Corporations will now be taxed at 21 percent, allowing corporations to take greater advantage of these tax credits. However, one limitation still applies. If a corporation has over $25,000 in regular tax liability, they cannot use R&D tax credits to offset more than 75 percent of their regular tax liability.
Under the TCJA, companies will no longer be able to expense costs that are related to research after 2021. These costs will be capitalized and amortized over a five-year period. Expenses for research activities performed outside the United States would be amortized over a fifteen-year period.
We’ve Got Your Back
As a tax advisor in the food and beverage industry, we ensure that our clients take full advantage of these tax credits. If you would like to learn if your company is eligible for these credits, please contact Sean Faust, CPA of KRS CPAs’ Food and Beverage Practice at 201-655-7411 or sfaust@krscpas.com.
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For taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers (individuals, trusts, and estates) may take a deduction equal to 20 percent of Qualified Business Income (QBI) from partnerships, S corporations, and sole proprietorships.
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