R&D for IPAs: Tax Breaks for Brewpubs
Over the past few years, it has become clear that craft beer is trending in the fast casual scene. While most fast casuals are stocking and selling, brewing their own is just around the corner. Owning and operating a brewery can be an expensive business, from the cost of maintenance and ingredients for brewing the beer, to employee compensation and everything in between. But a successful brewpub is well worth the cost: Not only are breweries significant for the restaurant industry, but they are also stimulants for the agricultural and tourism industries, so many stand to benefit from their continued prosperity.
What can fast casuals brewing their own beer do to help keep their costs in check and the lights on? One often-overlooked option is taking advantage of the broad array of state, local and federal incentives available to businesses of all sizes for their investments to develop new or improved products and processes. For instance, many business owners may not realize that they needn’t be a high-tech business to qualify for state and federal R&D tax credits. In fact, a wide swath of activities are eligible for these credits, not just groundbreaking discoveries, but also activities to incrementally improve products and processes. Even failed attempts can qualify. In fact, they’re even more likely to qualify.
Picture this: A local watering hole just opened in Far Rockaway, New York, and is already loved by New Yorkers old and young. This establishment brews and sells a large craft beer selection on-site in addition to quick and tasty bites, allowing customers to enjoy both in house and at home. The employees are continuously attempting to develop new hopping techniques and fermentation processes and have recently explored the idea of opening a separate bottling facility. As a registered distributor, this restaurant would be entitled to several tax credits and incentives.
At the federal level, helpful resources like the U.S. Small Business Administration (SBA) encourage innovation and healthy businesses. Through the SBA, several incentives for small businesses are funded, including one that is particularly relevant to brewers, the Small Business Innovative Research Grant Program (SBIR). This program helps to fund R&D through contracts and grants, awarding nearly $2.5 billion annually.
Brewers would also be remiss if they didn’t consider the opportunities that came with the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015. As a part of the PATH Act, many small businesses have a new opportunity to reduce their taxes, namely by offsetting their Alternative Minimum Tax (AMT) with R&D tax credits. In addition, some startup businesses can elect to take up to $250,000 in credits against their portion of payroll taxes (FICA) annually for up to five years. This allows companies to monetize credits where they previously could not due to a lack of federal income tax liability.
Several state and local incentives are available to the brewpub, as well. As a new business in the state, the brewery should consider the START-UP NY program, which offers companies tax incentives for up to ten years. Tax credits for this program encompass many taxes, including license and maintenance fees, sales and use tax, real estate/real property transfer tax and personal income taxes for New York State, New York City and Yonkers. For some, this program means no taxes at all. In addition, New York State offers exemptions that eliminate sales taxes on purchases of production machinery and equipment, property used for R&D purposes or fuels/utilities used in manufacturing and R&D.
Also available is the alcoholic beverage production credit, which is applicable for tax years beginning on or after January 1, 2016. This credit is equal to 14 cents per gallon for the first 500,000 gallons of beer, cider, wine or liquor produced in New York State in a tax year, plus 4.5 cents per gallon for each additional gallon over 500,000 (up to 15 million additional gallons for beer, cider and wine, and up to 300,000 additional gallons for liquor) produced in New York State in the same tax year.
New York is hardly the only state to make major investments to attract startups and small businesses— states and municipalities nationwide offer a variety of tax credits and incentives to complement those provided at the federal level. Given their ready availability, these incentives should be a critical part of the planning process for anyone thinking about opening a new brewpub, expanding into a new market or adding a brewing component to their existing restaurant. Businesses are encouraged to consult their tax advisor and reach out to their local SBA office or state and local economic development agencies to determine which incentives will yield the greatest benefit.
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