Planning for Tax Season: Food & Beverage Update
By Ryan Vaughan
The Food & Beverage industry has seen revolution over the past decade with the shift of consumers focus to clean labels, sourcing, and sustainability. Tax law has experienced a similar transformation with the passage of the Tax Cuts and Jobs Act (“TCJA”) at the end of 2017, as well as numerous other changes. These have created tax planning opportunities, helping companies manage their taxable income and cashflow. Two particularly valuable opportunities are the Research Credit and the Remodel/Refresh Safe Harbor.
The Research Credit, which was made permanent as part of the 2015 PATH Act, can be a useful tax planning tool for the food & beverage industry.
One of the common misconceptions surrounding the R&D tax credit is that participants must wear lab coats and use test tubes in order to qualify for the credit. This could not be further from the truth. In reality, the definition of R&D for tax credit purposes is fairly broad. Companies are able to qualify activities beginning with the development of concepts and extend to the point where a product, process, formula, or other business component is ready to be commercially released.
As the food & beverage industry shifts to better fulfill consumer demand, the Research Credit can apply to reformulating recipes, changing manufacturing processes, source alternative ingredients, and more.
Regardless of industry, size, or revenue, any company that performs activities that meet the following four tests may qualify for R&D tax credits:
- Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions.
- Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.
- Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Qualified purpose. The purpose of the activity is to create a new or improved product or process (computer software included) that results in increased performance, function, reliability, or quality.
If a company is engaged in any of these activities looking into a potential R&D tax credit may be a fruitful exercise.
Recent changes to the tax law have also had a significant impact on the R&D tax credit:
- The Tax Cuts and Jobs Act introduced several changes in how the R&D tax credit is utilized. The reduction of the top corporate tax rate to 21% creates an opportunity for taxpayers making the reduced credit election under section 280C(c)(3) to recognize 79% of the R&D credit versus 65% of the credit prior to the reduction in the tax rates. Additionally, the repeal of corporate alternative minimum tax (AMT) expanded the ability of corporate taxpayers to utilize the R&D tax credit and was expanded further through the NOL limitation imposed by the TCJA. This limits the amount of taxable income prior year NOLs can offset to 80%, creating taxable income.
In addition to permanently extending the R&D tax credit, the PATH Act made two very important changes effective for tax years beginning after December 31, 2015, which are intended to expand the reach of the credit.
- First, the legislation allows small businesses (gross receipts under $50M) to take the R&D tax credit against their AMT liability for tax years beginning after December 31, 2015. The AMT restriction has long prevented qualified companies from utilizing the R&D tax credit; the legislation removed that hurdle for eligible small businesses (ESB), defined below.
- Second, the PATH Act allows startup businesses with no federal tax liability and gross receipts of less than $5 million to take the R&D tax credit against their payroll taxes for tax years beginning after December 31, 2015, essentially making it a refundable credit capped at $250,000 for up to five years.
Remodel/Refresh Safe Harbor
This safe harbor applies to retail, restaurants, and owners of qualified property leased by taxpayers with applicable financial statements incurring qualified remodel and refresh costs. A remodel/refresh project is a planned undertaking by a qualified taxpayer on a qualified building to alter its physical appearance and/or layout.
On December 20, 2019, President Trump signed into law The Further Consolidated Appropriations Act (H.R. 1865, PL 116-94), (the “Act”), which included several technical corrections to the TCJA.
Notably, the Act did not include a technical correction to the TCJA addressing the drafting error which classified Qualified Improvement Property as 39-year property, as opposed to the previous 15-year property treatment. However, there is an opportunity for retail and restaurant taxpayers to accelerate the deductions related to remodel and refresh costs. Under Revenue Procedure 2015-56, a safe harbor election related to the Tangible Property Regulations creates an opportunity for retail, restaurant, and property owners in these industries to deduct 75% of remodel/refresh costs immediately as repair costs and depreciate the remaining 25% over the depreciable life (39 years).
To learn more about how to take advantage of these two important tax credits, please contact your Mazars USA LLP professional for additional information.