Food Manufacturers Benefit from R&D Tax Incentives
During the holiday season, many of us end up at a holiday party or two, celebrating with friends, family, and colleagues. It so happens, I was at a holiday gathering recently where a business colleague and I were sampling sweets while discussing corporate taxes when she asked, “Do cookie makers qualify for R&D tax credits?”
The short answer is, “absolutely.”
Food manufacturers, like other types of manufacturing companies, work hard to improve their market positions and bottom lines by developing new and improved products. For food manufacturers, research and development efforts might focus on meeting increasing demands for better flavor, improved shelf-life, reduced sodium, lower sugar and calories, as well as creating gluten-free and low-fat food items.
In addition to spending significant time and money addressing consumer demands, food manufacturers also invest heavily to improve production processes, throughput, and efficiency and to keep pace with ever-changing government and industry regulations.
As a result, cookie makers and other food manufacturing businesses are able to take advantage of federal and state R&D tax credit initiatives to substantially reduce their tax burdens – just like any other manufacturer. Many reinvest those saved tax dollars in their businesses to hire new employees, purchase equipment, and help reduce the cost of future development.
Here are some examples of qualifying food industry activities:
- Reformulate an existing food product to eliminate a specific allergen hazard, such as peanut oil, while retaining the flavor and consistency of the original product
- Develop a new or modify an existing recipe to improve appearance, taste, texture, etc.
- Retain an outside testing service to improve the shelf-life of a product, such as cookie dough used in ice cream
- Develop ingredient sets and processes for baked inclusions to achieve a desired texture
- Development of an efficient and effective sterilization system
- Testing trials for changes to production line to suit a desired effect
- Improvements to existing manufacturing processes to ensure desired run-rates and yields
- Development of more efficient and cost-effective equipment and processes for adding precise amounts of various types of vegetable oil to food manufacturing operations
- Developing new packaging constructs to simplify the filling process and reduce product cost
- Using biodegradable and environmentally friendly materials
- Creating packaging configurations that allow secure re-closure to improve shelf-life
- Developing new “convenient” packaging that allow for use in dispensing machines and grab-and-go customer convenience
If your firm engages in any of these or similar activities, you may be owed tax credits or refunds.
So, what is the R&D tax credit?
It’s a business tax credit created by Congress to promote innovation and jobs. Federal and state R&D tax credits can amount to as much as 20% of the costs incurred in developing new products, processes, and software as well as improving existing products, processes, and software. The R&D Tax Credit is not a deduction — it is a dollar-for-dollar credit against taxes owed or taxes paid.
Just how substantial can these tax credits be?
We conducted a study for a food manufacturing company that has been in business for over 20 years. We analyzed their qualifying activities and expenses (such as wages, supplies, and contract expenses) for one tax year and discovered that the company was able to claim approximately $108,000 in federal research and development tax credits. The company used the savings to purchase new equipment for R&D projects in the subsequent year.
If you’re in the food and beverage industry and engage in any of the previously mentioned qualifying activities, there’s a good chance that you would benefit from the R&D tax credit. The federal government awards billions of dollars in R&D credits every year, and if your company is not considering the potential of this tax incentive, you could be missing out on your share of these significant tax benefits.