BREWERIES
The R&D Tax Credit Explained
The Research & Development (R&D) Tax Credit is a federal (and often state-level) incentive that rewards U.S. businesses for conducting activities that develop or improve products, processes, techniques, formulas, or software. For breweries, this credit applies when you’re innovating—like refining a fermentation process, experimenting with new ingredients, automating bottling lines, or improving product stability.
Many breweries don’t realize that their day-to-day brewing and development efforts qualify as R&D under the IRS definition. As long as the activities meet the IRS’s four-part test (permitted purpose, technological in nature, elimination of uncertainty, and process of experimentation), they may be eligible.
QUALIFYING ACTIVITIES
Here are examples of qualifying R&D activities in a brewing environment:
- Recipe Formulation & Testing
- Developing new beer styles (e.g., hazy IPAs, sours, barrel-aged)
- Adjusting formulas for consistency or taste
- Gluten-free or low-alcohol variants
- Developing new beer styles (e.g., hazy IPAs, sours, barrel-aged)
- Yeast Strain or Fermentation Experimentation
- Testing and selecting specific yeast strains
- Modifying fermentation conditions (temperature, time, nutrients)
- Testing and selecting specific yeast strains
- Process & Equipment Optimization
- Reducing production time or energy usage
- Automating parts of the brew or bottling line
- Scaling recipes from pilot batches to full-scale production
- Reducing production time or energy usage
- Packaging & Shelf Stability
- Experimenting with canning/bottling materials
- Improving carbonation retention and oxidation prevention
- Experimenting with canning/bottling materials
- Sustainability & Environmental Innovations
- Water recycling systems
- Spent grain re-use experimentation
- Water recycling systems
- Compliance and Labeling Innovations
- Developing processes to meet evolving regulatory requirements (FDA, TTB)
- Developing processes to meet evolving regulatory requirements (FDA, TTB)
WHAT cAN BE CLAIMED
You can claim qualified research expenses (QREs) under the following categories:
- Wages: Salaries of employees directly involved in R&D (e.g., brewmaster, lab technicians, quality control)
- Supplies: Ingredients and materials used in experimentation (e.g., hops, malt, yeast)
- Contract Research: Consultants or labs hired for testing or formulation
- Cloud Computing Costs: If using platforms for simulation, recipe testing, or automation tools
WHAT DOESN'T QUALIFY
While many activities may seem innovative, not all qualify. Excluded activities typically include:
- Routine or non-innovative brewing (batching existing recipes)
- Market research and taste-testing not tied to technical experimentation
- Sales and distribution efforts
- Aesthetic improvements not grounded in science or process development
- Foreign R&D (only U.S.-based work qualifies)
Adaptation of existing products without technological advancement
HOW THE CREDIt WORKS
The R&D credit can be applied to reduce your federal income tax liability or even payroll taxes if you’re a qualified small business.
Two Common Uses:
- Income Tax Offset: Reduces what you owe in corporate income taxes.
- Payroll Tax Offset: For breweries with under $5M in revenue and less than 5 years of revenue history, you can use the credit (up to $500,000/year) against payroll tax liabilities.
The credit can be carried forward for up to 20 years if not used all at once.
AVERAGE TAX cREDIT FOR BREWERIES
The amount varies depending on scale and innovation intensity. Here’s a general range:
Brewery Size | Average Annual Credit |
Small Craft Brewery | $10,000 – $50,000 |
Mid-Sized Brewery | $50,000 – $250,000 |
Large/Multi-Site Breweries | $250,000 – $1M+ |
Actual savings depend on the amount of experimentation, documentation, and eligible expenses.
FOR SMALL TO MID-SIZED CRAFT BREWERIES
Craft breweries often overlook the credit, but they’re great candidates. You’re likely experimenting with:
- Seasonal batches or collaborations
- Pilot batches and small-scale tests
- Manual-to-automated system transitions
- Innovations in flavor, texture, or alcohol content
Payroll tax offset is especially helpful for these businesses that may not yet be profitable.
Tips:
- Keep logs of recipe changes and test batches
- Track R&D time by employee role
- Retain receipts for raw materials used in trials
FOR LARGER OR MULTI-LOCATION BREWERIES
Larger brewers can leverage more substantial credits due to:
- Dedicated R&D teams
- Sophisticated labs or pilot plants
- Formalized process engineering or packaging development teams
Larger breweries often:
- Scale recipes between locations
- Develop proprietary yeast strains
- Implement major sustainability or supply chain innovations
Documenting all these activities is critical, and you may want an R&D tax credit specialist to help compile a defensible claim in case of IRS audit.
