How to Claim R&D Tax Credits for Breweries in 2024

The Research and Development Tax Credit offers a substantial financial advantage for innovative breweries.As craft, micro, and other small breweries increasingly experiment with new flavors and processes, the reasons to leverage these tax incentives are only growing. 
Written by
Jozef Lewitzky
Published on
July 10, 2024

The Research and Development Tax Credit offers a substantial financial advantage for innovative breweries.

As craft, micro, and other small breweries increasingly experiment with new flavors and processes, the reasons to leverage these tax incentives are only growing. 

What is the R&D Tax Credit?

The research and development tax credit encourages businesses to innovate and think ahead. It credits an average of 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses.

The R&D tax credit applies mainly to small and medium-sized businesses. It provides tax incentives for:

  • Developing new products or services
  • Improvements in old products or services
  • The creation or testing of new prototypes 

How Does the Research & Development Tax Credit Work?

The R&D tax credit provides tax breaks to companies that conduct research and develop new products, improvements, and other innovations

If the firm has been in business for less than 5 years and has less than 5 million in gross receipts, the R&D tax credit can be applied to payroll taxes. This allows firms that have yet to profit to benefit.  

Can Breweries Claim The R&D Tax Credit?

Yes, breweries can claim the R&D Tax Credit. 

The credit applies to activities done by any company that uses research and development to experiment with and improve its business products or processes using the hard sciences.

The IRS uses a four-part test to check whether different activities qualify for the credit. For breweries, things like the development of new brews, improvements on existing formulas, and changes to the brewing process can all qualify. 

Breweries explore uncharted territories with their creations and different kinds of brewing technology, and the experimental nature of their craft allows their business to qualify for the R&D credit.

How to Claim R&D Tax Credits for Breweries

How to Claim R&D Tax Credits for Breweries

Claiming the R&D tax credit for brewing companies is not too complicated. You can follow the steps below to get started:

Check Your Eligibility

To qualify for the R&D Tax Credit, a brewery's activities must be substantiated through record-keeping that aligns with the IRS requirements for qualifying research activities (QREs). Here’s how to check:

  1. Documentation: It is crucial to maintain thorough records of your R&D activities. This includes lab notes, design drawings, trial results, project files, and correspondence. Collectively, these files should demonstrate the progression of the brewery’s research. 
  2. Consistency with Business Components: The research activities must be related to a qualifying business component of the brewery. This includes any product, process, formula, invention, technique, or software that the brewery develops or improves upon. 
  3. Substantial Rights and Risks: Finally, for them to qualify, breweries must retain substantial rights to the products or processes developed through their R&D efforts. This means they should have ownership or exclusive rights to the intellectual property generated by their efforts. 

The Four-Part Test

To qualify for the R&D Tax Credit, your projects must be engaged in activities that pass the four-part test that was created by the precedent set by the 2023 IRS case:

  1. Permitted Purpose – The project aims to create or improve the functionality, performance, reliability, or quality of a business component.
  2. Elimination of Uncertainty – The project begins with uncertainty about how to achieve the project goal and involves work to eliminate this uncertainty.
  3. Process of Experimentation – The project involves a systematic process of experimentation by evaluating one or more alternatives.
  4. Technological in Nature – The experimentation relies on the hard sciences, such as engineering or computer science.

Although still somewhat subjective, using previous examples to show that one’s efforts fall within the four parts is the most straightforward way to claim your case.

Speak to a Tax Planning Team

To confirm if your brewery’s activities qualify for the R&D tax credit, you can talk to a tax planning team.

A tax attorney knows the tax code best and can maximize your claim, itemizing everything they believe will cut.

They also provide peace of mind, knowing that your claim is being filed by a licensed tax attorney who will ensure complete legal compliance.  

Lastly, they can also help set your company up right if and when you are audited by the IRS, ensuring the process runs smoothly.

Examples of R&D for Breweries

Examples of R&D for Breweries

At first, for beverage producers and for beverage manufacturing in general, you might think they may seem like unexpected places for R&D.

But if you think about it, a lot is going on behind the scenes that may qualify. 

The development of new drinks often involves a lot of experimenting, tinkering with the formula, and overcoming new technical challenges.

Things like improving the drink's environmental sustainability and health factors can also come into play. 

Here are 3 concrete examples of activities a brewery might do that qualify for the R&D credit:

  1. New and Improved Brewing Processes: A brewery experiments with a novel fermentation process using a new type of yeast that could potentially increase alcohol content without compromising on flavor. They do multiple trial batches, analyzing different fermentation temperatures and adjusting brew times to optimize the yeast's performance. 
  2. Experimenting with Different Ingredient Combinations: A craft brewery is developing a new seasonal beer that incorporates locally sourced herbs and berries. They do a few test batches to refine the recipe, conduct sensory evaluations, and modify the hop blend and malt base to balance the unexpected flavors of the unconventional ingredients. 
  3. Increasing Efficiency of Bottling and Packaging: A brewery develops an automated bottling line integrated with a real-time monitoring system to reduce oxygen levels in the headspace of the bottles, thereby extending the beer's shelf life. 

How The IRS Calculates the R&D Credit

The IRS uses two primary methods for calculating the R&D tax credit: the traditional and the Alternative Simplified Credit (ASC) method.

  1. Traditional method – Document and calculate 20% of research expenses over a base amount. The base amount is a fixed-base percentage multiplied by the average annual gross receipts for the last 4 years.
  2. Alternative Simplified Credit (ASC) method – This method calculates the credit based on 14% of the qualified research expenses (QREs) that exceed 50% of the average QREs for the 3 preceding tax years. If the company had no research expenses in any of the previous three years, the credit is 6% of the QREs for the current year​​.

The approach you should choose depends on the calculation method that best suits a company’s financial situation and R&D spending patterns.

How Much Can Breweries Earn from the R&D Tax Credit?

Generally, breweries can anticipate recovering approximately 7% to 10% of their R&D expenditures through these tax credits. 

For instance, a brewery spending $200,000 on qualifying R&D activities could see tax credits ranging from $14,000 to $20,000

The extent and nature of a brewery's qualifying research and development activities determine its financial benefit from the R&D tax incentives for breweries. 

The final amount can vary widely, influenced by the scope of the projects undertaken, the costs involved in experimentation and development, and how much the brewery's practices adhere to the letter of the tax credit law.

Regardless, you can see why these are lucrative, making the R&D tax credit for breweries worth looking into for even small craft breweries.

Frequently Asked Questions

How Far Back Can You Claim R&D Tax Credits?

You can claim R&D Tax Credits for the last 3 tax years. If your company has missed out, you still have a chance to amend past returns and get the credit. This could lead to significant savings on already completed research and development initiatives.

Can Wineries and Distilleries Claim the R&D Credit?

Yes, similar to breweries, wineries and distilleries can also claim the R&D tax credit.

Wineries are just as eligible as breweries as long as they meet the same kinds of qualifying activities.

However, many wineries don’t experiment with the fermentation process in the same way as distilleries and craft breweries and, therefore, may not be eligible as often.  

How Should Breweries Document R&D Expenses?

You should document all R&D-related expenses. Here’s how:

  • Keep detailed records of all experiments with different brewing methods and results.
  • Make notes on the whole process of trial and error, including changes in formulation or recipes.
  • Track employee hours spent on R&D activities.
  • Preserve all receipts and invoices related to R&D expenses.

What Doesn’t Qualify for the Credit as a Brewery?

Not all activities of a brewery constitute R&D under the tax credit guidelines. Examples of non-qualifying activities include:

  • Market research
  • Ordinary quality control
  • Production and manufacturing
  • Innovations in sales and advertising

Start Your R&D Claim - Do You Qualify?

At RevenueSafe, we explore a business’s R&D methods and expenses to ensure a compliant claim of maximum value. Our process is simple, straightforward, and easy to use. So don’t wait, take the opportunity now to save money for your business. 

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