How to Claim the R&D Tax Credit for Food/Beverage Production 

Introduction   

Commercial food and beverage production is all about innovation. Consumer preferences constantly evolve, and producers must keep up with changing tastes. Shoppers vote with their wallets – today it’s a push for “clean label foods,” tomorrow it might be quick-prep dinners, and next month plant-based meat analogues might be the trend du jour.  

Food and bev industry professionals are constantly iterating to meet consumer demands while maintaining quality standards, minimizing waste, and keeping costs down. Naturally, this involves a lot of trial and error, experimentation, and problem-solving — exactly what the R&D Tax Credit is designed to reward.  

Who Can Benefit?  

You’re likely picturing a big factory with snack foods coming down an assembly line. And that’s spot on – any mass-produced product is likely to be a great candidate.  

But the Credit can also be successfully claimed by:  

• • Wineries 

• • Breweries 

• • Bakeries (like our case study below) 

• • Packaging companies  

• • Companies working to improve production process/automation 

• • Even firms developing software used in food production  

How can Food/Bev Producers Qualify?  

The R&D Tax Credit is an activities-based Credit, and most food and beverage manufacturers qualify for the R&D Tax Credit just by performing their day-to-day activities. If you develop or improve a product or process, you likely perform Qualifying Research Activities (QRAs).  

To officially be considered a QRA, your activity must pass the IRS’ Four-Part Test. Let’s run through the Four Parts, and use a real-life bakery, Client HC, as an example.  

PART I: New or Improved Business Component: The activity must be related to developing or improving the functionality, quality, reliability, or performance of a business component. In this industry, the business component is usually a food product or manufacturing process.  

Client HC had long specialized in delicious and attractive vegan baked goods, but hoped to expand their operation by offering holiday chocolates. The qualified activities included developing and perfecting holiday chocolate recipes, designs, and packaging.  

PART II: Elimination of Uncertainty: The activity must be undertaken for the purpose of eliminating some uncertainty 

• • Can I make a brand-new product?  

• • What will the new product design look like? How can I make it?  

• • Can I improve an existing product?  

• • Can I improve the process by which the product is made?  

• • Can I scale up the product and still meet quality standards?  

Client HC faced much uncertainty – can the chocolates be made vegan and tasty?  Can they be made shelf-stable even with exotic fillings?  Can we create distinctive holiday chocolate molds that will result in sturdy pieces of candy?  

PART III: Process of Experimentation: The activity must involve some kind of experimentation designed to resolve the uncertainty, which may include:   

• • Evaluation of Alternatives 

• • Hypothesis Testing  

• • Systematic Trial and Error  

• • 3D Modeling or Simulations  

Client HC evaluated multiple alternatives. They experimented with different formulations and techniques to develop a textured effect on some chocolates. They tried a variety of vegan milks to create an Earl Grey tea filling. Molds and boxes underwent multiple design iterations.  

PART IV: Technological in Nature: The activity must be based on a hard science – and food science counts.  

Client HC’s activity involved food science, chemistry, and engineering.  

Which Food/Bev Production Activities Qualify?  

Client HC conducted a number of qualifying activities, but there are many more. Let’s take a look at other industry activities that likely qualify:  

Product Design/Improvement  

• • Developing new or improved food/beverage products to stay current with consumer trends  

• • Developing new formulations to improve taste/texture, enhance nutritional content, mitigate ingredient sourcing issues, or reduce cost 

• • Experimenting with ingredients or packaging design to extend shelf life 

• • Redesigning existing packaging for a new purpose — biodegradable, recyclable, portable (grab-and-go, drinkable)  

• • Scaling up small-batch recipes for mass production  

Process Design/Improvement  

• • Developing automated or optimized processing and packaging systems 

• • Developing new or improved sanitization methods to enhance food safety and quality 

• • Streamlining production processes to improve efficiency and reduce waste 

• • Refining flash-freezing, packaging, cold-chain handling, and energy-efficiency in the frozen food industry  

• • Developing or improving software to help manage and facilitate services (online ordering, delivery status, etc.) or operations 

What Can Food/Bev Manufacturers Claim Towards the Credit?  

Qualified Research Expenses (QREs) are expenses related to QRAs. QREs are the expenses that can qualify for the Credit. For every identified QRE dollar, taxpayers may recoup up to $0.10.  

Let’s look at the most common food industry QREs and also take note of Client HC’s QREs.  

Supplies/Materials  

Basically, what you need to conduct your Qualified Research Activities. Raw ingredients can be a significant cost driver.  

• • Consumables, ingredients, raw materials  

• • Sensors, test instruments  

• • Test packaging films and materials 

• • Test cultures 

• • Prototype costs 

• • Small-or large-scale test batches  

• • Materials used to develop and test prototypes and pilot models  

In 2024, Client HC’s supply costs totaled $189,698.  

Wages 

Employee wages may qualify for the Credit as well. Those who are actively engaged in the research are included of course, but the wages of those involved in supervising or supporting the research may also be claimed. The following job titles are illustrative of the types of positions eligible:  

• • Biologist 

• • Chemist 

• • Food Scientist 

• • Manufacturing Engineer 

• • Packaging Engineer 

• • Process Engineer  

• • Automation/Robotics Engineer 

• • Product Development Associate 

• • Quality Assurance (QA) Technician 

• • Brewer, distiller  

• • Support and Supervisory Roles 

The “80% Rule” or the “Substantially All” Rule, is a taxpayer-friendly provision. If 80% of the work performed by an employee is related to QRAs, 100% of the wages paid to the employee may be captured as QREs and included in the Credit calculation.  

In 2024, Client CH had $503,875 in qualified wages.  

Third-Party Contractor Wages   

Payments made to third-parties for services like outside lab testing, etc. may be claimed towards the Credit, as long as the third-party is based in the US.  

One important note – only 65% of these payments may be claimed towards the Credit. 

Client CH used third-party support to design custom holiday chocolate molds and packaging. Only 65% of the payments were claimed, and the qualified contractor wages totaled $23,472.  

How Can Food/Bev Manufacturers Claim the Credit?   

Manufacturers can claim the R&D Credit by filing IRS Form 6765, Credit for Increasing Research Activities. The Form is being expanded significantly for TY 2026 and beyond, with Section G in particular requiring a more robust study process and expanded documentation.  

What kind of documentation may be helpful in supporting a food/bev industry claim?   

• • Employee Form W-2s 

• • Employee Time Logs  

• • Listing of Job Titles 

• • Supplier receipts/contracts  

• • Photographs 

• • Tax Returns 

• • Design iterations, formulation logs, batch records 

• • Recipe Tasting Notes 

• • QA Checklists  

• • Correspondence 

• • Hand Sketches  

What Kind of Benefit is Possible?  

The amount of the Credit depends on the value of the QREs, not on company size or overall revenue. The more a company spends to innovate, the more they can potentially save, regardless of company size or scope.  

The Federal R&D Tax Credit offers up to 10 cents in benefit for every qualifying dollar identified in a study. If there is a state version of the Credit the benefit could be significantly more, and even doubled in states like California.  

Client HC is based in PA, which has a robust state credit as well.  

Client HC’s Total QREs for TY 2024:  

Client HC’s R&D Tax Credit for 2024 

Between Federal and State Credits, Client HC was able to recoup 10% of their QREs. As long as they continue to innovate products and processes, they may continue to claim the Credits annually.  

What if You’re Just Starting Out?  

Client CH was an established manufacturer, but what about firms just getting off the ground?   

Small businesses that are operating in a loss and don’t have tax liability yet may be eligible for the Payroll R&D Tax Credit, a modified version of the Federal R&D Tax Credit. 

The Payroll R&D Tax Credit permits “Qualified Small Businesses” to claim up to $500,000 annually for tax years beginning after December 31, 2022, and to use that credit to offset the 6.2% employer portion of the Social Security payroll tax under the Federal Insurance Contributions Act (FICA) as well as the 1.45% employer portion of the Medicare payroll tax liability. (For tax years prior to December 31, 2022, the maximum claim is $250,000 and the credit only applies to the social security tax.) 

The Payroll R&D Tax Credit can be taken for up to 5 years, resulting in a potential total credit of $2.5M to apply against payroll taxes.  

What Should a Manufacturer Do Next?   

If you’re interested in learning more about how you might benefit, you need to consult an R&D Tax Credit provider.  

Claiming the Credit requires a strong understanding of the food/bev industry and how the tax code applies. Your provider will be combing through your manufacturing process start to finish, identifying all QRAs and tying QREs to them. It’s important to select a provider with the technical and tax knowledge required to do the job right, especially in light of the recent changes to Form 6765.  

The Capstan team can review your situation in a 15-20 minute call to get a sense of your activities and expenses and then provide a Credit estimate. Together, we can cook up some savings.