The federal R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s regular tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried back one year or carried forward for up to 20 years. Additionally, over 30 states offer R&D tax credit incentives to further increase a company’s savings.

In general, the R&D credit claim is approximately 6%–10% of a company’s qualified expenses, depending on several factors. Generally, the more a company spends on qualified R&D, the higher the credit it’ll receive, with taxpayers receiving a larger credit if they increase R&D spending year-over-year. The savings could be even greater if that company is also performing R&D in a state that offers an R&D credit.

The R&D tax credit isn’t limited to the work of scientists or dedicated R&D laboratories. Most producers of alcoholic beverages perform qualifying R&D activities as part of their normal operations.

Some examples of activities that may be eligible for the R&D tax credit include developing, designing, or testing new or improved:

• Product recipes for flavor, texture, and aroma profiles
• Product formulations, such as ready-to-drink or low alcohol by volume (ABV)
• Heating techniques and enzymes for mash
• Fermentation techniques and yeast strains
• Equipment design such as stills, tanks, crushing, sorting, and bottling
• Automated processes
• Filtration or straining methodologies
• Bottling and packaging processes
• Methods for consistency, stability, and shelf life
• Methods for sustainability
• Software applications

Most qualifying expenses fall into three categories:

• Wages
• Supplies
• Contractor expenses

Wages

Qualifying employee wages can include Form W-2, Box 1, or pass-through income subject to self-employment tax. This would include individuals performing qualified research as well as those that directly support or supervise the research. The rules specify if an employee is 80% qualified, 100% of their wages can be included to calculate the credit.

Some examples of eligible staff include the following.

• A winemaker, brewer, or distiller who’s driving new product or process development
• Engineers, technicians, or fabricators developing new equipment
• Production or cellar staff crafting test batches and prototypes
• Lab or quality assurance personnel testing new products

Supplies

Qualified supplies include tangible property used in the qualified research, such as:

• Ingredients
• Enzymes
• Yeast
• Lab equipment and supplies

Qualified supplies may also include:

• Small- or large-scale test batches
• Prototypes
• Pilot models

Contractor Expenses

Payments to contractors may also be eligible, but they’re subject to some restrictions.

Qualified contractor expenses typically include the following.

• Consultants
• Temporary labor
• Outside testing
• Other third-party services

With recent increases in IRS scrutiny around R&D credits, it’s crucial to understand what’s necessary to substantiate a credit claim. Like many other aspects of tax compliance, documentation is important for both the quantitative and qualitative aspects of the R&D tax credit.

From a quantitative perspective, taxpayers should maintain documentation for employee wages, specifically Form W-2 data, as well as general ledger detail for any supplies or contract research related to R&D. Ideally, these amounts should be tracked by project, account, and vendor and be easily identifiable within the general ledger.

From a qualitative perspective, taxpayers should retain all formal and informal documentation created during the R&D, such as:

• Project descriptions or plans
• Trial designs
• Test logs and reports
• Sensory and organoleptic evaluations
• Chemical analysis
• Notes, presentations, and emails