Page 21 - Beverage Master February March 2020

Craft Beverage

the R&D credit in the current tax year because they or improved level of: function, performance,
do not have current income tax liability to utilize reliability, quality, durability or cost reduction
the credit. Despite the credit having a 20 year carry for a product or manufacturing process
forward if not used currently, the company receives
no immediate tax advantage from the R&D cred- 3. The activity must involve the elimination of
it, especially for years in which R&D activities and uncertainty. The activity must explore what was
investments may be high. not known at the start of the project.

Payroll Tax Offset • Capability: Can we develop the new or
improved product or process?
However, the Protecting Americans from Tax
Hikes (PATH) Act of 2015 allows certain small busi- • Methodology: How will we develop the new
nesses to offset the R&D credit against payroll or improved product or process?
taxes instead of income taxes. PATH allows for up
to $250,000 of annual federal R&D credits that can • Design: What is the appropriate design of
be allocated against payroll tax liability. This applies the new or improved product or process?
to tax years that begin after Dec. 31, 2015.
4. The activity must involve a process of exper-
To qualify for the payroll tax offset in 2019, a busi- imentation. Substantially all activities must
ness must have gross receipts of less than $5 mil- include elements of experimentation such as:
lion in 2019 and may not have had gross receipts
for any tax year before the five-tax-year period • Evaluating one or more alternatives
ending with 2019. For example, if the credit-claim- • Performing testing or modeling
ing year is 2019, a company must have had less • Examining and analyzing hypotheses
than $5 million of gross receipts in 2019 and no • Refining or abandoning hypotheses
gross receipts prior to 2015.
A wide range of technical activities related to
The R&D credit may be applied against the FICA product or process development or improvement
portion of payroll taxes beginning in the first calen- in the craft brew industry may qualify for the R&D
dar quarter following the date on which the busi- credit. Consider the examples below:
ness files the income tax return. If the payroll tax
credit portion of the R&D credit exceeds the tax lia- • Developing new or improved recipes and
bility for any calendar quarter, the excess is carried styles.
to the next calendar quarter and allowed as credit • Brewing experimental or pilot batches of
for that quarter. The payroll tax election is limited new or improved recipes and styles.
to five taxable years. • Performing lab testing, or other functional
testing, on new or improved products or
Four-Part Test processes.
• Developing new or improved ingredient
Naturally, the question then becomes, what are mixing methods.
“qualifying activities” to be able to claim the credit • Developing new or improved yeast strains
and what costs can be captured? Generally, activi- or fermentation processes.
ties must meet the following four criteria (referred • Developing new or improved manufacturing
to as the “four-part test”) to include the related processes.
wages, supplies, or contract research costs in the • Researching new or improved production
R&D calculation: techniques.
• Automating existing manufacturing process-
1. The activity must be technological in nature. es.
The activity must be based on the principles of • Developing new or improved processes or
a hard science such as chemistry or engineering. methods to prevent spoilage.
• Developing new or improved bottling or
2. The activity must be for a permitted purpose. packaging processes.
The activity must involve the creation of a new • Developing new or improved methods to

BEVERAGE MASTER February - March 2020 19

BM120120 Main Pages .indd 19 1/27/20 3:56 PM