The Brewery R&D (Research and Development) Tax Credit is a government incentive program designed to encourage innovation and technological advancements in the brewing industry. While it offers significant benefits to breweries engaged in qualifying research activities, some challenges can be associated with claiming and maximizing the R&D Tax Credit.
Common Tax Challenges Breweries May Face Under the Research and Development Tax Credit
Use Tax Liability on Giveaways or Promotional Merchandise
Breweries often provide giveaways or promotional merchandise as part of their marketing activities to increase brand awareness and customer loyalty. However, breweries need to be aware of the potential use tax liabilities associated with these items. The use tax is typically imposed on the use, consumption, or storage of tangible personal property where sales tax was not charged at the time of purchase. When breweries purchase promotional merchandise from vendors that do not have a sales tax nexus in the state they are shipping to, the brewery may be responsible for remitting use tax on the value of those items. Calculating the use tax liability can be challenging, as breweries may need to determine the fair market value of the items at the time of distribution, which may require reasonable estimation based on their cost, retail value, or other relevant factors. Compliance with use tax obligations can be complex, especially for breweries selling in multiple states, as each state has its own rules and rates for use tax.
Physical Nexus Triggered by Inventory or Returnable Containers in Another State
Breweries often distribute their products to various locations, and some may store inventory or use returnable containers in another state. This activity can inadvertently trigger a physical nexus, which establishes a tax presence in that state, potentially subjecting the brewery to various tax obligations such as sales tax, income tax, and other related tax liabilities in the state where the inventory or returnable containers are located. Proper tracking and management of inventory and returnable containers are crucial to mitigate the risk of triggering a physical nexus. Breweries should consider implementing robust inventory management systems and consulting with tax professionals to understand the implications of their distribution and storage activities in other states.
Economic Nexus Triggered by Sales and Transactions into Other States (Remote Sales)
With the growth of e-commerce and remote sales, breweries engaging in sales or transactions across state borders can trigger economic nexus. Economic nexus refers to a sufficient level of economic activity within a state that creates a tax obligation, even without a physical presence. The threshold for economic nexus varies by state and may be based on the gross value of sales or the number of transactions. Breweries need to monitor their sales and transactions in other states to determine if economic nexus thresholds are met. Meeting economic thresholds could potentially require a brewery to register and collect sales tax in those states. Compliance with economic nexus rules can be complex and burdensome, as breweries need to understand each state’s requirements and stay updated on any changes in nexus laws. Technology solutions, such as sales tax automation software, can help breweries manage their tax compliance and navigate economic nexus challenges.
Eligible Research & Development Tax Credit to Maximize the Amount of Savings
The R&D Tax Credit offers significant benefits to breweries engaged in qualifying research activities. However, breweries may face challenges in identifying and documenting eligible research and development activities. Defining and substantiating qualifying research activities and associated expenses can be complex, requiring breweries to meet specific criteria set by the IRS. Proper recordkeeping and documentation are crucial to support R&D claims and withstand potential audits or reviews. To maximize the amount of savings through the R&D Tax Credit, breweries should consider engaging tax consultants or experts with expertise in R&D Tax Credits. These professionals can help breweries navigate the complexities of the program, identify eligible activities, optimize their tax savings, and ensure compliance with documentation requirements. They can also assist in conducting a comprehensive analysis of research and development efforts to capture all eligible expenses and activities, ultimately maximizing the potential tax benefits. To overcome these challenges, breweries can consider seeking professional assistance from tax consultants or experts with experience in R&D Tax Credits.
Withum’s Brewery Services Team is here to help navigate the complexities of the program, ensure compliance with documentation requirements, and maximize eligible credits while minimizing audit risks. From setting up an efficient tax structure, determining tax compliance obligations, and obtaining tax credits, benefits, and exemptions, we are here to be your trusted resource. Ready to start the conversation? Request a complementary consultation to identify if your brewery is eligible for the R&D tax credit.