California knows how to make alcohol. The state is home to an exceptional number of wineries, distilleries and breweries. In fact, as of October 2019, more than 1,039 craft breweries were in operation across California – more than any other state in the nation.
The California-based craft brewing and wine businesses contribute significantly to the economy statewide and nationwide. In 2015, California wineries brought in $57.6 billion to the state economy and $114.1 billion to the national economy. Furthermore, in 2018, craft breweries contributed $9.01 billion to California’s state economy.
But as the industries hum along, success also comes with considerable tax burdens and operating expenses. In 2018 alone, California wineries paid $15.2 billion in state and federal taxes and paid an additional $34.9 billion in U.S. wages. Craft breweries felt the sting as well, paying $906.1 million in state and local taxes in 2018 and spending $3.44 billion in labor income.
So what if there was a way to reduce your tax liability? Whether you operate your brewery, winery or distillery in California or elsewhere in the United States, you have access to one of the most beneficial – and overlooked – tax credits: the federal R&D Tax Credit.
What is the R&D tax credit?
Enacted in 1981, the federal Research & Development (R&D) Tax Credit rewards companies of all sizes and industries for their domestic efforts in research and experimentation and contributions to technological advancement.
The R&D Tax Credit is significant, as it provides a dollar-for-dollar tax credit to offset income tax liabilities. In fact, the R&D credit is one of the largest tax incentives available – offering businesses more than $10 billion per year. Therefore, for an industry spending a considerable amount on state and federal taxes, this credit could provide valuable tax savings.
In order to qualify for the R&D credit, your business must perform activities meeting the following criteria:
- Activities relate to the development or improvement of products, processes, or techniques;
- Activities involve the application of principles of the physical or biological sciences, engineering, or computer sciences; and
- Activities involve an evaluation of alternatives used to eliminate technical uncertainties faced during the development process.
To calculate the R&D credit, the tax code allows three categories of expenses for consideration – employee wages, supplies and contractor expenses.
Also of note is the legal standing of the federal R&D credit. Previously, the government determined the status of the credit from year-to-year, leaving many companies wary of going through the credit calculation process in the first place. However, through the 2015 Protecting Americans from Tax Hikes (PATH) Act, the federal R&D credit is a permanent fixture in American tax code. Furthermore, the PATH Act introduced expansions, allowing eligible companies to apply the credit against alternative minimum tax (AMT), payroll tax, and income tax.
For more about the R&D Tax Credit and the Four-Part Test, please reference here. For more specific information on how small businesses and start-ups can take advantage of the credit under the new PATH provisions, please refer to here.
How does the R&D tax credit pertain to the alcoholic beverage industry?
Even with the explanation of the R&D credit test and insistence that the credit is viable for a wide array of industries, there may be lingering questions as to how those in the wine, beer and spirits industries can utilize the credit.
In reality the R&D Tax Credit employs a broad definition of research and development, and this means that most alcoholic beverage producers already perform qualifying R&D activities in their test kitchens, breweries, wineries, distilleries or even production floors.
By developing new and improved products, there is already consistent refinement of manufacturing and distribution techniques and development of new packaging processes. Then factor in the latest consumer trends.
There is an overwhelming trend, led by younger generations, where consumers lean towards fresh, healthy, artisan-produced, local and organic ingredients in their food and beverage choices. As consumer desires evolve so must the products. This is where innovation, and therefore, new research and development, is a must.
What are examples of qualifying activities specific to the beverage industry?
For those operating in the wine industry, you may be eligible for R&D tax credits for your involvement in testing and development of new or improved:
- Strains of grapes
- Soil and rootstock processes
- Irrigation systems
- Fermentation and maceration processes
- Filtration and fermentation methodologies
- Bottling, corking and packaging processes
- Blended wine formulation
- Product prototype batches
- Testing processes
- Sustainable energy efforts
- Optimization of bottle filling techniques
- Attempts to optimize fermentation process
- Other manufacturing process improvements
Similarly, those in the brewing and/or distilling industry may qualify for the R&D tax credit through involvement in one or more of the following activities:
- Development of new or improved product formulations
- Experimentation with new or improved ingredient mixing methods
- Exploration of alternative fermentation techniques
- Testing and evaluation of different boiling, roasting and conditioning process parameters
- Experimentation with different clarifying agents
- Development of new or improved filtration methods
- Experimentation with alternative preservatives
- Design and testing of brewing technologies
- Development of new or improved designs for cans and bottles
- Shelf-life optimization efforts
- Consideration of new or improved waste management techniques
- Attempts to maximize water recycling capability and sustainability practices
- Optimization of keg, can or bottle filling techniques
- Ongoing attempts to optimize brewing process efficiencies – waste reduction, product consistency and quality
How can Squar Milner help?
As you try to figure out whether or not your business qualifies for the R&D tax credit, you need a team who knows their stuff. At Squar Milner, we have a tax team specifically dedicated to performing R&D tax credit services.
We have a significant background in helping companies from across different industries take advantage of this tax incentive, with particular experience working with those who produce alcoholic (and non-alcoholic) beverages.
Beyond that, we have tax and audit professionals committed to working with clients in the manufacturing & distribution industry who can provide additional accounting services as needed.
With our R&D and M&D professionals working in tandem, we can help you develop the most effective tax and accounting strategy tailored to you. Contact us today to learn more about the R&D credit and how it might be able to help your business.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.