Major Food and Beverage Tax Savings Considerations
Much has been written about the pandemic’s effect on the food and beverage industry. Now that supply chain issues are minimal and people are more comfortable socializing at restaurants, those in the industry can look ahead with optimism. Several trends that emerged during the pandemic are likely to influence the industry into 2023 and provide tax-saving opportunities:
Research and Development Tax Credit
The federal government and many states provide a research and development (R&D) tax credit to advance new, as well as improved, product and manufacturing processes.
Why consider the R&D credit?
- Potential refund of previously paid taxes
- Increase working capital
- Generate immediate cash flow by reducing current tax liability
What activities qualify?
- Blending, formulation, mixing, and value-added processing
- Reduction in scrap, improved efficiency, and elimination of processes
- Taste and raw material evaluation
- Food design and implementation
- Packaging and labeling
- Pre-productive quality assurance
- As funding increases for innovation and disruptive food items, new sources of proteins and sweeteners, along with ingredients that are natural and organic, may qualify for the credit as companies experiment with new product offerings.
Additionally, as larger food conglomerates look for new channels of growth, including mergers and acquisitions, they also can take advantage of any credits that an acquired company may have generated, to offset their tax liabilities; so even if you are a small company don’t pass up the credit.
Amid higher prices for ingredients, packaging, and other inputs some consumer packaged goods manufacturers have decreased product weight, quantity, and/or size to reduce costs. Known as “shrinkflation,” downsized products for the same price come at a time when inflation-pinched consumers are hypervigilant about getting the most for their dollars.
This, too, can lead to R&D tax opportunities, as companies reformulate their recipes and packaging. The same can be said about sustainability, which has become an important consideration in how to manufacture both current and new products entering the marketplace.
Some companies promote their efforts to tackle food waste by connecting people with unsold product from restaurants and grocery stores.
Food companies and retailers are allowed a tax deduction for charitable contributions of inventory made to a qualified charitable organization. The deduction is the lesser of the fair market value of the donated item or its cost.
Taxpayers who take a deduction for a food contribution must reduce their cost of goods sold by the original purchase price of the food that’s being donated. To take the deduction, the Internal Revenue Service (IRS) states that the following conditions must be met:
- Make a contribution of wholesome food from a trade or business to a qualified organization.
- The food must be given only to the ill, the needy, or infants.
- The use of food given to the qualifying organization is related to the organization’s purpose or function.
- The organization cannot transfer the food to another organization.
- The donor must receive a written confirmation from the organization stating that it will comply with the above requirements.
- The organization is not a private, non-operating foundation.
- The food meets all requirements and regulations of the federal Food, Drug and Cosmetic Act on the date of transfer and for the previous 180 days.
Generally, if a qualified donation is made, a taxpayer can deduct its tax basis in the donated inventory plus half of the gain that would have been recognized in income if the inventory had been sold at its fair market value on the date of the contribution, limited to twice its tax basis.
The biggest limitation on this deduction historically was that the charitable deduction amount was limited to 15% of the business’s net income. If a restaurant is unable to claim all of the charitable deductions allowed in the year of donation due to the net income threshold, the un-used charitable deductions may be carried forward five years.
Businesses can expense 100% of the cost of business property acquired before January 1, 2023. This may be beneficial if a business is running taxable income through the current year but would prefer to use potential tax payments to buy new equipment for the business, reducing taxable income dollar for dollar.
Note, however, that while federal law allows expensing of business property, many states may not. Check with your tax advisor to ensure proper reporting.
Cash Method of Accounting
The cash method of accounting requires that sales be recognized when cash is received from a customer, and that expenses be recognized when payments are made to suppliers. This is a simple accounting method, which makes it attractive to smaller businesses.
There are many advantages to the cash method of accounting, such as:
- Control over when cash is spent for reducing taxable income, since once a payment is made it is generally deductible. Credit card charges can be expensed even if payment to the credit card company is made a month later.
- Companies can generally control when they receive income from customers.
- Companies can generally accelerate deductions and defer income, which increases control.
State and Local Tax Opportunities
New products or services offered may change the business’s state tax profile. Different types of businesses may be subject to different tax rules.
- A manufacturer may be subject to different apportionment rules than a restaurant.
- A restaurant may be subject to different sales tax rates and/or exemptions than a manufacturer.
Income tax and sales tax nexus
- Receipts above a certain dollar threshold can create nexus-states have different amounts.
- Transactions over a certain threshold in various states can create nexus.
- Property in a state, including storage of inventory, can create nexus even if inventory is in a third party-owned warehouse, consignment shop, or pop-up store. Also, delivering products or inventory into a state using company-owned vehicles can create nexus.
- Employees or independent contractors performing services in a state can create nexus.
Sales and use tax
- Restaurants and food manufacturers may be eligible for sales tax exemptions and/or use tax exemptions for the purchase of items used within the restaurant or manufacturing facility.
- Proper collection of sales tax should be considered when restaurants offer discounts, such as a percentage off a meal, buy one/get one, or coupons.
- There are different sales and use tax implications if customers are wholesalers or end users.
- If customers are wholesalers, confirm proper collection and retention of resale certificates.
- If customers are end users, confirm proper collection and remission of sales tax.
- There may be different sales tax implications if concession sales in a theater are open to the public vs. being open only to those attending the theater event.
Credits and incentives
- Hiring credits
- Research and development credits
- Expansion credits
- Manufacturing credits
- Work opportunity tax credits (federal)
- Restaurant return-to-work tax credits (New York COVID-related hiring credit)
- There may be an opportunity to defer taxability on the sale of gift cards until services are actually rendered.
- Consideration should be given to unclaimed gift cards.
Other State Considerations
- Texas margin tax may be reduced by increasing costs included in costs of goods sold.
- Back of house costs
- Front of house costs
- A company that rents space in New York City, including each of its five boroughs, may be subject to the Commercial Rent Tax.
The above are just a few tax-saving opportunities available to food and beverage companies. For more information or recommendations specific to your circumstances, contact your Marcum food and beverage professional.