Are You Leaving Research and Development Tax Credits on the Table?

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The research and development (R&D) tax credit benefits companies across various industries. While the credit has been around for a while, it is frequently overlooked in the food and beverage industry. However, as food and beverage companies rely more heavily on technology to improve products and increase efficiencies, the importance of reviewing expenditures for the R&D tax credit has become much more critical. The federal R&D credit can be as much as 20% of the qualified expenditures over a base amount and, in addition to the federal tax credit, 41 states have their own R&D tax credit programs, which largely follow the federal definition. These credits can assist your company to continually invest in R&D activities that can help you maximize profits.

What Activities Qualify for R&D Credits?

There are common misconceptions on what activities qualify for R&D credits, and over the past number of years the credit has been expanding to areas not typically thought of as R&D. As a general rule, activities will qualify if the activity is intended to discover information that would eliminate uncertainty concerning the development or improvement of a product, process, etc. Below are some examples of qualifying activities for the credit that apply to the food and beverage industry:

Food-Related R&D Activities:

  • Developing recipes for new products/flavorings
  • Improving food product formulations
  • Producing and testing prototype samples

Process-Related R&D Activities:

  • Developing new production techniques that reduce costs
  • Improving existing processes for efficiency purposes
  • Designing processes to conform to regulatory standards

Packaging-Related R&D Activities:

  • Developing new package designs that increase functionality or shelf life
  • Developing packaging to improve product integrity
  • Changing the process to use more environmentally friendly materials

Sustainability Efforts:

  • Creating a process that converts waste into energy
  • Creating new procedures for minimizing waste, contamination, spoilage and scrap
  • Increasing energy efficiencies through new technologies

This is a brief list of some activities that could qualify for the R&D credit and is not all inclusive. There are many processes and activities not listed that can qualify.

There are four criteria (or tests) provided by Regs. Sec. 1.41-4(a) to determine if an activity is eligible.

  1. Involve the creation of a new or improved product or process (quality, function, reliability or performance)
  2. Provide information that eliminates technical uncertainty (capability, design or methodology)
  3. Have an experimentation process (trial and error)
  4. Rely on a hard science (engineering, physical, biological, or computer science)

All activities must be identified and documented, which may require you to change your recordkeeping processes on how you record expenses. Be sure to develop a methodology associating your costs to projects that align with your internal reporting structure. Although the processes needed to claim the credit can take time and resources, the outcome can result in operational and monetary benefits for your company.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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