Imagine accessing a “secret cash stash” to give your brewery a financial boost.
One that you could use to invest in new equipment that you’ve been eyeing, hire a few more employees to help out, or even expand your taproom this summer.
That would be a dream come true, right?
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 many breweries qualify for.
In this blog post, we’re discussing what the R&D Tax Credit is, why it’s suitable for 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 and restaurants, R&D takes place during many different activities in a brewery, including:
- Developing new beer recipes
- Improving brewing processes
- Designing new brewing equipment
- Conducting market research
- Conducting quality control testing
- Training employees on new brewing techniques
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 for many small and mid-size companies
- 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. Additionally, the taxpayer may be able to expense all qualifying R&D costs in the year incurred
- 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 business 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.
The brewing process relies on chemistry, physics, and engineering, and brewers often test and evaluate their products.
For example, brewers may experiment with different ingredients or brewing techniques to create new beers. They may also test the quality of their beer by measuring its alcohol content, bitterness, and color.
This type of activity would qualify as a QRA.
In addition to the brewing process, there are other activities that take place at breweries that could qualify as QRA.
For example, brewers may conduct research on new ways to package or distribute their beer. They may also develop new marketing campaigns or branding strategies. All of these activities could be considered QRA if they rely on chemistry, physics, and engineering, and involve testing and evaluating procedures.
Here are a few examples of brewery tasks that could qualify for the R&D Tax Credit:
Qualifying Research Activities (QRAs)
- Developing new beer recipes
- Improving brewing processes
- Designing new brewing equipment
- Conducting market research
- Conducting quality control testing
- Training employees on new brewing techniques
Qualifying Research Expenditures (QREs)
- Employee compensation for performing qualified services
- Supplies used in the conduct of qualified research
- Payments to another person for the right to use computers in the conduct of qualified research
- Contract research amounts paid to a third party to perform qualified research or services
- Basic research payments made to qualified educational institutions and scientific research organizations
If you are unsure whether or not your activities qualify for the R&D Tax Credit, you should consult with an experienced brewery tax advisor.
How Much Can You 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 in order to qualify for the credit.
The first step in doing this right is getting the correct documents in order, which include the following:
- Project notes and other documents showing any processes that impact your research.
- Timesheets records for meetings, payroll, work plans, and other R&D qualified eligible activities
- Payroll information for employees or managers directly involved in R&D activities.
- General ledger reports with a list of supplies and expenses related to R&D and which ones are not.
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 owner, 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’ve successfully done this for many clients and already have a working procedure.
Ready to save more cash in your brewery? Let’s talk!
