One of the most overlooked (and fascinating) industries that should be taking advantage of the R&D tax credit is food and beverage. Whether it’s a manufacturer of finished food products, an ingredient or flavor developer, or even brewing and distilling, there is usually a lot of interesting research and development. The Research and Experimentation Tax Credit (often called the R&D Credit) can be a powerful way to help bring back some of the investment in the form of a dollar-for-dollar tax credit. The R&D credit does a great job of rewarding the entire footprint of certain product and process development activities within a company. The footprint includes (but is not limited to) the people and supplies to develop the product or process, and it extends to testing, quality, regulatory compliance, and direct supervisory activities.
When Congress created the R&D Credit, the goal was to reward investment in both new and improved products along with new and improved processes. Nearly any commercial efforts in the food and beverage industry will involve at least one of the following: initial concept development of a new product, new manufacturing methods, line extensions, quality improvements, and changes for regulatory standards.
While Internal Revenue Code Section 41 – Credit for Increasing Research Activities guidelines specifically excludes “aesthetics” including projects relating “to style, taste, cosmetic, or seasonal design factors;” typically, technical R&D is required to meet the chemistry, materials science, and engineering needs of the project. Once the food or beverage profile or specification is created, the work to develop a commercial product is highly technical. The science and engineering involved with scale-up and mass production are just as technical as any industrial application.
Opportunities in the food and beverage industry are not limited to the initial product creation and scale-up. Development work related to new ingredients such as alternative sweeteners, salt reduction, allergen management and protocols, CBD, and other functional ingredients and dietary restrictions like vegan and keto are also good indicators of potentially eligible investments.
Production improvements to comply with the Food Safety Modernization Act (FSMA) also potentially generate R&D tax credits. Efforts related to these activities are required by companies of all types, from start-ups to mature producers. Even line extensions may be eligible. Any product modification that adds steps to the production process can trigger a qualified research project.
National and global certifications also provide an opportunity for the food and beverage industry to leverage the R&D credit. Creating, developing, and modifying products to meet ever-changing requirements presents a challenge to manufacturers. Kosher, Halal, organic, sustainable, non-GMO, and other dietary specifications present further challenges on top of any existing food safety concerns.
Packaging and distribution projects can step into the limelight as an area for R&D credit opportunity. Adding in new and improved packaging capability and capacity like canning and bottling for a brewery, automating manual packaging processes, and technology implementation to improve cold-chain management can all be great opportunities to find qualified research expenses.
Ingredient traceability another challenge faced by the increasingly global food and beverage industry. Records intended to track the entire ingredient supply chain require high-tech methods for data management and processing. The traceability data aids in recalls and contamination avoidance, along with providing a chain of information for every batch made by each link of the chain. But to comply with the resulting increased data requirements, many companies must turn to new software solutions for managing this information. Investing in and integrating these unique data solutions into existing systems involves substantial technology investment.
The food and beverage industry offers many opportunities for the recapture of investment through the R&D tax credit. The R&E tax credit experts at SSF are here to provide direction and can offer a plan to allow you to stake a claim to your share of the credits available. The R&D tax credit process, while complex, can be navigated efficiently and effectively with the right help. As we said in the title, we want you to be able to make your cake and eat it too.