Businesses in the food industry constantly strive to anticipate changes in consumer behavior and improve existing products or bring new products to market. They also invest in evaluating their processes and equipment to increase quality, automation and efficiency, while reducing cost and waste. As a result, food and beverage manufacturers are often excellent candidates for the federal research and development (R&D) tax credit.
How can the R&D tax credit benefit businesses in the food and beverage industry?
The federal R&D tax credit can help food and beverage companies directly offset their tax liability based on qualified research expenses (QREs) for the development or improvement of products, formulations, processes, software, techniques or inventions. This credit generally amounts to approximately 5 to 10% of QREs for any given year. Businesses can also typically claim R&D tax credits retroactively for the three prior years by amending filed tax returns and can carry them forward for up to 20 years.
Does your food business qualify for the R&D tax credit?
Qualified research, as defined by the IRS, is based on a four-part test:1
- Was it intended to develop or improve the functionality, quality, reliability or performance of a product, process, software, technique, formula or invention?
- Was its development technological in nature?
- Was there a technological uncertainty about either the capability, method or appropriate design at the outset?
- Was a process of experimentation used to overcome the technical uncertainty?
What are some qualified research activities specific to the food industry?
Examples of R&D activities typical for food and beverage companies may include:
- Developing new or improved food/beverage products to stay current with consumer trends (organic, gluten-free, easy preparation, etc.)
- Experimenting with ingredients or packaging design to extend shelf life
- Developing automated or optimized processing and packaging systems
- Developing new or improved sanitization methods to enhance food safety and quality
- Developing or improving software to help manage and facilitate services (online ordering, delivery status, etc.) or operations
Qualified research expenses
Employee wages, contract research expenses or supplies related to the previously mentioned activities may be considered qualified expenses for the R&D tax credit if the labor is performed in the United States. General and administrative activities, on the other hand, do not qualify, even if they were wholly or partially performed in support of research.
Tax credit opportunities for small businesses in the restaurant industry
Small business owners who have not yet turned a profit sometimes assume that they’re not eligible for the R&D tax credit because they don't have any income tax liability to which the credits could be applied. This way of thinking, however, may be short sighted. In fact, the Protecting Americans from Tax Hikes (PATH) Act of 2015 included a new option for qualified small businesses to use their R&D tax credits against future payroll tax liabilities.
A qualified small business under the PATH Act is defined as one that has less than $5 million in gross receipts in their tax filing year and $0 gross receipts prior to the five years leading up to the tax filing year. For example, if a company had less than $5 million in receipts/sales/income in 2019, it would be able to claim the R&D tax credit if it did not earn income prior to 2015. Earnings from 2015 to 2018 would not negate its eligibility.
As the previous example shows, the PATH Act allows small businesses in the food and beverage industry to focus on innovation as a competitive advantage and improve their cashflow by offsetting qualified R&D expenses.
How ADP can help your food industry business file for the R&D Tax Credit
ADP has the experience, technology and resources necessary to help make claiming tax credits as simple as possible. We specialize in helping businesses, including those in the food and beverage industry, identify and document qualified expenses and get maximum value from the R&D tax credit. ADP also keeps pace with regulatory changes so we can support our clients in their efforts to comply with tax credit legislation affecting their ADP services.