Cooking up Restaurant Tax Credits for Research and Development

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Just a small percentage of companies that qualify for the R&D Tax Credit actually claim it, with many wrongly assuming the credit is just for manufacturers and scientists.

Restaurant owners might be surprised to find how “research and development” applies to much of what they do on a regular basis. The same proprietary systems, cooking techniques or sustainability programs they use to differentiate themselves from competitors could make them eligible for significant savings.

Are you taking advantage of restaurant tax credits for the research and development you are already doing? Here’s how to be sure you’re keeping all the money allowed.

Order Up: Put It to the Test

Consider these cases: Chick-fil-A implemented an upstream ordering system, which speeds up the number of transactions per hour by allowing guests to order while in line. Panera rolled out additive-free reformulations of menu items company-wide.

For your restaurant to qualify for an R&D Tax Credit, you must be engaging in activities that pass a four-part test:

  1. Qualified purpose: Develop a new or improved product, process, technique, formulation, invention, patent or software that results in increased performance, function, reliability or quality. For example, you might be testing a sauce for bulk production to maintain quality and consistency.
  2. Technological nature: Your activities need to depend on hard science, such as chemistry, biology, computer science or engineering. Simply using less salt to reduce sodium won’t count, but scientific methods for boosting flavor without salt might.
  3. Elimination of uncertainty: Aesthetic changes are not enough. You have to try to cut uncertainty about developing or improving your products or business. Let’s say you want to reduce your food waste by half. Will you be able to attain your goal? How will you do it? Document any unknowns.
  4. The process of experimentation: This is where the scientific method comes heavily into play. Line up alternative methods of resolving the uncertainties in your process. Prototype product samples with different sweeteners, test and validate new recipe formulations, and refine or discard your hypothesis as needed.

Check, Please: Federal and State Credits

The benefits of an R&D Tax Credit are available at the federal and state levels and can reduce income tax or payroll tax withholdings.

If your efforts pass the test and your restaurant is generating taxable income, you can claim a dollar-for-dollar federal credit, based on your company’s development efforts. The federal program alone typically saves businesses up to 7 percent on their income taxes.

Expenses that qualify may include salaries of domestic employees and managers working on the project, wages paid to U.S.-based contractors, patent lawyer fees and the cost of necessary supplies.

States approach calculation of the credit differently. For example, the Georgia R&D Tax Credit can offset up to 50 percent of a company’s income tax and be carried forward 10 years. Any excess credit can be applied to offset state payroll withholding.

If this is news to you, the good news continues into the past. Your business might be eligible for a refund with an amended return. The Internal Revenue Service (IRS) allows you to carry the expenses back for three years. If you don’t owe any taxes, you can’t claim the credit — but it can be carried forward 20 years.

Carefully track R&D programs and expenses to maximize your restaurant tax credits and consult a tax advisor if you’re uncertain whether your restaurant qualifies.

Be sure to find the tax credits hidden in your business. Your waiters wouldn’t leave money on the table, and neither should you.

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