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W W W. M A I N E B I Z . B I Z 35 S E P T E M B E R 5 , 2 0 1 6 M aine is the proud home of a number of microbreweries, with frequent startups placing us among the top breweries per capita in the nation. Legitimate reduction of income taxes is one way a new brewery can reduce a signifi cant barrier to survival and growth. An often-overlooked tool to reduce taxes is the federal research and development credit, and breweries young and old, large and small, should take advantage of the signifi cant tax savings it can provide. How it works Tax credits are more potent than tax deductions, because while deduc- tions reduce income on which tax is based, credits reduce tax itself, often dollar-for dollar. e R&D credit can be viewed as a way to convert outlays from deductions to credits. e credit is provided in Section 41 of the Internal Revenue Code, and several variants of it are avail- able, including the regular credit, the reduced regular credit and the alternative simplifi ed credit. While the computations behind these credits are anything but simplifi ed, in general, the current year's qualifying research costs are compared to a baseline of similar costs in prior years. Startup breweries without an established baseline are provided with amounts and ratios necessary to avail themselves of the credit during their early years. e credit is obtained by attaching an additional form to the brewery's income tax returns, and although subject to several limitations, can reach as high as 20% of qualifi ed costs. Various types of entities may use the credit, including S corpora- tions and partnerships which are able to pass it through to their owners for use on their own returns. Once computed, the credit off sets current year income tax. If not fully utilized, it may be carried back to the previous year, and carried forward for 20 years. While not the focus of this article, many states (including Maine) off er research credits of their own. Costs that qualify e types of expenditures that qualify for the credit are those that are intended to discover information that is technical in nature for use in developing a new product, formula or process — essentially, the "craft" in "craft brewing." Nearly all of the outlays should relate to a process of experimentation. is means that the outcome, or viability of the undertak- ing must be unknown. e credit is intended to reward risk, and is available whether or not the project is successful. How the credit helps breweries Common misunderstandings regard- ing the R&D credit are that it relates only to new products, or only applies if a patent is awarded. But because the credit also applies to improvements in processes, many common activities of startup breweries are eligible, as long as the criteria described above (technical, experimentation) are met. Examples of qualifying activities may include: ¡ Bottling line/canning process and improvements ¡ General process improvements ¡ Effi ciency improvements ¡ Experimental brewing processes ¡ Barrel aging process and improvements Wages paid to employees who work on projects like the ones described above not only may qualify, but gener- ally represent the largest component of qualifying costs. (Contracted labor costs may qualify too.) Employees nearly always split time between qualifying research activities and other non-qualifying tasks, and their wages may be allocated between the two for purposes of the credit. e R&D credit seems almost custom-made for startup brewer- ies, and their business owners should become familiar with the criteria and accustomed to identifying and track- ing eligible costs. ere is a cost to the pursuit of the R&D credit, as it involves complex calculations that require a knowledgeable tax profes- sional. F or many, the tax savings pay for the added cost many times over. M P is a CPA and senior tax manager at Baker Newman Noyes in Portland, and a member of the Boulder, Colo.-based Brewers Association, a trade association. He can be reached at @ . Craft tax savings for breweries with the federal R&D credit B Y M A T T P O R E H OW TO KatahdinTrust.com | 1-800-221-2542 Ask us how we can help your business grow.

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