Founders understand that R&D/product development is a critical part of bringing a food and beverage company to life and staying ahead of the competition. However, most don’t realize that they can actually get paid for these activities. Wait, did you say get paid for R&D? Yep, through tax credits. In this post, we’ll outline the basics.
What is a tax credit?
A tax credit is an amount of money that can be subtracted directly from taxes owed. Credits differ from tax deductions, which reduce the amount of taxable income. Let’s look at a simple example.
As you can see, a $10k tax credit is much more powerful than a $10k tax deduction.
How does it work for R&D?
There are two main types of credits and they depend on your company stage…
The Federal R&D Tax Credit (For More Established Companies)
Allows you to reduce your income tax liability in the current tax year, and receive a cash refund for taxes paid in the last three years.
The credit can be carried forward for up to 20 years and is totally uncapped.
For instance, if you’re eligible for $200k in tax credits but only have a $100k tax bill this year, the remaining $100k could be used in the following year.
The Federal Payroll Tax Credit (For Younger Companies)
Allows you to reduce your company's share of FICA payroll tax liability. To claim this credit, your company must be <5 years old or have <$5mm in gross receipts/year.
Unlike the R&D tax credit, the payroll tax credit is capped at $250k/year.
There are also state-level credits...
Many states (highlighted in orange) have also implemented their own versions, and qualifying companies can claim both.
According to the Federal Reserve Bank of San Francisco, the value of a state R&D tax credit has grown four-fold since Minnesota first offered a state R&D Tax Credit back in 1982.
What Sort of R&D Activities Qualify?
Each year, countless food and beverage companies miss out on claiming the credit because they do not realize that their operations qualify as research and development. Where we find the R&D in F&B companies typically occurs in recipe development and internal process improvements.
A brewery was founded in the early 2010’s, and brews about 5,000 barrels each year. With 6 people involved in brewing to some degree, they frequently experiment with new beer styles, seasonal flavors, and a sour program.
Leyton showed them that the experimentation around bringing new beers to market incurred expenses which qualify for R&D tax credits.
3 years' worth of credits resulting in $200k+ in savings
A food processor was routinely devising new flavors, tinctures, and additives. They were experimenting with production processes and formula combinations.
Leyton showed them that applying principles of food engineering to overcome technical uncertainties, salaries incurred from employees engaged in R&D activities, and supplies used in test batches could qualify.
3 years’ worth of credits resulting in $1.3mm+ in savings.
Founded in 1997, Leyton is a global innovation funding consultancy dedicated to helping our clients improve their business performance. In the US, our specific expertise is in federal and state R&D Tax Credits. The team is made up of highly experienced scientists, engineers, and tax consultants and attorneys. Our technical and financial experts determine eligible R&D projects – historical, current, and expected future – and identify expenditures related to qualifying activities. Our studies make it possible for clients to optimize the amount of their R&D Tax Credit Claim or Payroll Tax credit Claim or both.