By: Helen Han (guest blogger from R&D Incentives Group)
Another guest blogger, Kevin Zolriasatain from KBKG, recently wrote aboutR&D credits for the food and beverage industryfor this blog. Expanding on the topic, this post dives deeper into the R&D credits specifically for the wine industry.
People familiar with the workings of wineries and vineyards know they need to keep evolving with the ever-changing consumer demands, economical constraints and environmental concerns to stay competitive. Many wineries have either never heard of the Research and Development (R&D) tax credit or do not perceive what they do as scientific or experimental.
The actual truth is that a great deal of the activities wineries engage in qualify for the R&D tax credit. This was further solidified when the Internal Revenue Service (IRS) released new Treasury Regulation Sec. 1.174-2 on July 21, 2014, which specifically states in example 10 that a wine producer could claim research tax breaks for production costs association with a “different method of crushing the wine grapes” as it tests a new manufacturing process. With this proclamation, there is truly no doubt that wineries can qualify for the R&D tax credit.
What is the R&D Tax Credit?
The R&D tax credit is an exceedingly lucrative incentive. The U.S. government spends nearly $10 billion a year on the R&D tax credit incentive. It is a dollar-for-dollar credit that directly offsets the taxes owed. It generally amounts to 13 percent of identified R&D expenses. If there are more R&D tax credits than taxes owed, they can be carried forward 20 years and back one year for federal purposes and carried forward indefinitely for California. Further, if the taxpayer has not taken the credit before, they can look back to all open years for federal and state tax purposes (typically three to four years) to claim the missed credits. This results in a refund being issued to the taxpayer.
How do you determine what activities/projects qualify? The IRS has come up with a four part test. In order to claim the credit all four of the tests listed below must be satisfied.
- Qualified Purpose. The purpose of the activity/project must be to create a new or improved product or process, in order to bring about increased performance, function, reliability or quality.
- Elimination of uncertainty. There must be uncertain about the ability to develop or improve a product or process.
- Process of experimentation. There must be identifiable actions, such as modeling, simulation, systematic trial and error or other methods that demonstrate an evaluation of alternatives for achieving the desired result were performed.
- Technological in nature. The process of experimentation must rely on hard sciences, such as engineering, physics, biology, chemistry or computer Soft sciences are excluded and they include economics, psychology, sociology and economics.
Once it is established that the four tests are satisfied, the next step is to gather the expenses associated with the now qualified activity/project. There are generally three types of expenses that go into the R&D tax credit:
- Wages for employees who performed qualified worked on the project (generally Box 1 of the Form W-2)
- Supplies that were used and consumed during the project
- Sixty-five percent of outside contractor expense to the extent they were performing qualified work on the project
It is important to note there are technical nuances that dictate how these expenses are calculated. Sadly, some taxpayers, and even accountants who are unfamiliar with the R&D tax credit, overlook these technical nuances and miscalculate the credit.
Once the expenses are gathered, the R&D credit specialist will perform the appropriate calculation. There are several methods available. A seasoned R&D credit professional will be able to determine the most appropriate and beneficial method.
It is also very important to identify and gather documentation that relates to each segment of the four-part test. While evaluating the wineries activities and projects, the R&D credit specialist will also assist in classifying and organizing the documents. Some of the types of documents wineries and vineyards utilize that might satisfy this requirement are:
- Label/package specifications
- Additive trial notes
- Blend analyses
- Acidity adjustment analyses
- Blend code information
- Meeting notes
- Handwritten notes/drawings
- Emails relating to any of the four part tests
Examples of R&D qualified winery activities
Commonly accepted examples of winery activities that qualify for the R&D tax credit include:
- Evaluating irrigation systems
- Testing different strains of grapes
- Improvements to manufacturing and distribution processes
- Ongoing design and development to subterranean wine cave improvements
- Evaluating soil, water availability and ground slopes to assess the optimal grape cultivation
- Investigating method improvements to packaging materials and counter-pressure filing technological developments
- Sustainable energy/efforts
- Evaluating varied methods of filtration to prevent microbial spoilage to increase wine quality
- Efforts to improve the economic efficiency of the fermentation process
- Developing and testing product prototype batches
- Assessing for efficiency and quality bottling, corking and packaging processes
Wineries should not miss the R&D tax credit opportunity
The R&D tax credit can save companies in the wine industry hundreds of thousands of dollars. As stated above, qualifying R&D activities are almost unescapable in the wine industry, but sadly many such companies fail to claim the R&D tax credits to which they are entitled. The amount of R&D tax credits a company can claim will depend on many factors, but the possible tax savings make it well worth the time to examine the opportunity.
About Helen Han (guest blogger from R&D Incentives Group)
Helen Han is a business development and account manager with R&D Incentives Group and has been involved with assisting CPA firms and their clients with identifying and securing various tax incentives since 2011. Her experience encompasses servicing a wide variety of clients across a broad range of industries including: consumer electronics, manufacturing, job shops, architecture and engineering firms, software developers, and food and beverage. Helen is a frequent guest speaker on the topic of research tax credits for CPAs, tax practitioners, financial management teams and other industry executives.