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R&D Tax Credits for the Food Processing Industry

Even today, many companies in the food processing industry don’t realize they’re eligible for research & development (R&D) tax credits, which enable companies to save on taxes, expand their cash flow, and remain competitive in the marketplace arena. As a matter of fact, in the food processing industry, many activities that qualify for the credit are considered day-to-day operations. Is your company leaving money on the table? 

The credit’s benefits can be significant. Thanks to the R&D tax credit, your company can gain a hidden but immediate source of cash from prior years, while significantly reducing its current and future years’ federal and state tax bills.

The R&D Tax Credit is Primarily a Wage Credit

In the U.S., we have a strong R&D tax credit that rewards this exact activity. This federal credit offsets the costs of employee wages and supplies involved in the research required to create new products or improve existing ones. In fact, 42 states also have a tax credit that often mirrors the federal credit. As a result, you may be able to double the cash benefits allotted. In addition, the IRS does allow a three-year catch-up period for any missed credits; and since the R&D tax credit has recently been made permanent, owners of these companies can get these credits annually. 

Additional Tax Advantages: Alternative Minimum Tax Offset—Plus $250,000 in Payroll Offset for Startups

If you operate a small business with $50 million or less of gross receipts, you can claim your R&D tax credit against your Alternative Minimum Tax (AMT) tax bill.

If you’re a startup—even if you’re not paying federal income tax—you can use your R&D tax credit to offset up to $250,000 of your FICA payroll tax for your first five taxable years. But you must have gross receipts of less than $5 million in the tax credit year, along with zero gross receipts for any taxable year before the five-taxable-year period that ends with the tax credit year.

In the Food Processing Industry, What Activities Qualify for the Credit?

  • Hiring food scientists and other knowledge workers 
  • Developing new, state-of-the-art machinery and equipment to produce and test food products
  • Developing new food processes, including batching sequences, mixing times, and cooking temperatures and durations
  • Improving existing production processes to improve efficiency
  • Developing recipe formulations for new food products and flavorings
  • Improving existing food product formulations to enhance sensory qualities or nutritional requirements
  • Improving existing food product formulations to achieve targeted analytical requirements
  • Producing prototype product samples to test and validate new recipe formulations
  • Testing prototype samples for analytical and microbiological qualities
  • Conducting sensory evaluations of prototype samples
  • Creating innovative packaging
  • Developing new or packaging designs to provide enhanced functionality or increase product shelf life
  • Developing software for tracking the production chain
  • Enhancing food preservation

Case Study: How ETS Saved a Food Client Major Tax Dollars

One of our recent clients is a food delivery provider with over 200 meal options that serves all Long Island, Queens, and Brooklyn in New York state. Recognizing that most people are constantly on the move, our client offers an easy way to eat healthily by providing meals that contain all-natural ingredients high in protein, fiber, and antioxidants. 

Our client obtained substantial R&D tax credits because of its investment in research and development designed to create new and improved products and processes to upgrade its meal solutions for its clients. The company experiments to achieve maximum functionality and performance of each unique project. Its R&D activities encompass most of the qualifying activities enumerated in the bulleted list directly above.

Here's what we saved them in taxes:

Tax YearQREsTax Credit
2021$ 373,574$ 29,512
2020 $ 301,313$ 24,064
2019$ 314,563$ 24,850
2018$ 214,938$ 16,980

Supporting Small-to-Mid-Sized Businesses

Large food manufactures are well-aware of the credit, and they’ve been taking advantage of it since the 1980s. However, we find most small to mid-size companies are missing out. Why? Mostly due to lack of awareness and because these studies are technological in nature, so they seem mysterious. 

But because the IRS has strong guidelines that requires an R&D study to be quite thorough, it’s best to use an expert like Engineered Tax Services that specializes in these studies. 

Getting an R&D Tax Credit Analysis to see if you qualify is the first step!

eBook: The Architect's Guide to R&D Tax Credits

This comprehensive e-book is designed to help you recognize which of your activities qualify for R&D tax credits! 

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