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Craft Beverage
minimize or treat wastewater. Documentation Requirements
For reference, examples of activities that may not Federal and state regulators focus on whether a
qualify include: taxpayer can document: 1) the process of exper-
imentation, and 2) the development of a new or
• General administrative and managerial func- improved product or process (also referred to in
tions. a research credit discussion as “the business com-
ponent”). To maximize the credit taxpayers are
• Sales, marketing and business development well-advised to conduct a disciplined, document-
activities. ed research process. It is important to document
every step of the research process, particularly
• Routing data collection (e.g., management the process of experimentation used to eliminate
studies, efficiency surveys). uncertainty and the identification of the business
components, i.e., the new or improved product or
• Day-to-day production activities. process. Sales increases and customer surveys will
help to identify improved products, but will not be
• Routine quality control and inspection. conclusive. It’s the contemporaneous recording of
the research activity that will carry the day in an IRS
• Maintenance and installation services. exam.
• Training (even if related to new equipment It’s also important that breweries identify the
or technology). amount of time that professionals spend perform-
ing qualified research activities. Time tracking soft-
• Research conducted outside the U.S. ware that identifies the various activities that take
place when creating a new or improved product
Qualifying Costs or process is the best option to document time
spent by professionals in the conduct of qualified
As mentioned above, the following costs are research activities. Taxpayers that do not use time
included in the R&D calculation: tracking software generally use estimates provided
by the research professionals, through the use of
1. Wages paid or incurred to employees who are time surveys, as to the percentage of time that they
directly engaged in qualified research activities, spend conducting creditable research activities.
or who directly supervise or support qualified
research activities. Qualified wages are com- Case Study
puted by multiplying the percentage of an indi-
vidual’s annual time attributable to qualified To see how the credit can benefit a craft brew-
research activities against W-2, box 1 wages. er, the following case study is instructional. In this
example, XYZ Brewery in Texas wants to design a
2. Supplies include any tangible property, other new brew from scratch. Once research is conduct-
than land and depreciable property, which is ed to determine the ideal end product (and this
used or consumed during the development pro- research should qualify for the R&D credit), here is
cess. the process employed by the brewer (pre-bottling)
and who is involved:
3. Payments to third parties to perform research
and development activities on your behalf. The General R&D process including potentially qualify-
services must be performed within the U.S. and ing activities:
you must have financial risk (with T&M or hour-
ly contract terms paying for the services versus 1) Mashing – malts are mixed with adjunct flavor-
final product). ings and liquor (pure water) and heated to allow
enzymes to break down starch into sugars.
There are two calculation methodologies to con-
sider, alternative simplified credit and regular cred- 2) Lautering – consists of three steps: mash out,
it, both with alternatives for start-up companies. recirculation, and sparging.
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