Latest / Craft Brewery Financial Training Podcast / Brewery R&D Tax Credits, Demystified

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Brewery R&D Tax Credits, Demystified · Craft Brewery Financial Training Podcast

• 0:00
  Kary Shumway: Today on the podcast, I speak with Maggie Crowley and Devin Medrick from Leighton.
• 0:04
  Kary Shumway: We're going to talk all about the Research and Development Tax Credit.
• 0:08
  Kary Shumway: So, what is this?
• 0:08
  Kary Shumway: It's a federal incentive that allows breweries to reduce income tax liability in the current tax year and receive a cash refund for taxes paid in the last three years.
• 0:18
  Kary Shumway: Now, there's lots of details, as you might expect, when it comes to taxes.
• 0:22
  Kary Shumway: So Maggie and Devin are here to break it all down and explain it.
• 0:26
  Kary Shumway: So we're going to go through what the RD tax credit is and what qualifies as RD in a brewery environment.
• 0:34
  Kary Shumway: We're going to share some real-world examples of those brewery activities, such as recipe development, process improvement, and equipment testing, and how you can translate those costs into credits.
• 0:46
  Kary Shumway: So for now, please enjoy this conversation with Maggie Crowley and Devin Medrick from Leighton.
• 0:53
  Kary Shumway: Welcome to the Craft Brewery Financial Training Podcast, where we combine beer and numbers to provide you with tips, tactics, and strategies so that you can improve financial results in your brewery.
• 1:03
  Kary Shumway: I'm your host, Carrie Shumway, a CPA, CFO for a brewery, and a former CFO for a beer distributor.
• 1:10
  Kary Shumway: I've spent the last 20 years using finance to improve financial results in our beer business.
• 1:15
  Kary Shumway: Now I'm helping other craft breweries to do the same.
• 1:18
  Kary Shumway: Are you ready to take your brewery financial results to the next level?
• 1:22
  Kary Shumway: Okay, let's get started.
• 1:28
  Kary Shumway: Just a quick note, and we'll be right back to the podcast.
• 1:31
  Kary Shumway: I want to let you know about a new network for beer industry professionals.
• 1:35
  Kary Shumway: It's called the Beer Business Finance Association.
• 1:38
  Kary Shumway: It's an organization of financial pros, just like you, looking to improve financial results, increase profitability, connect with your peers, and share best practices.
• 1:49
  Kary Shumway: So I'd love to tell you a little bit more about this.
• 1:52
  Kary Shumway: If you are interested in learning more, please email me, Carrie at Beer Businessfinance.com.
• 1:57
  Kary Shumway: That's K-A-R-Y at beer businessfinance.com, or you can visit BBFassociation.org.
• 2:05
  Kary Shumway: That's BBFassociation.org to learn more.
• 2:10
  Kary Shumway: Hey, Maggie and Devin, welcome to the podcast.
• 2:13
  Kary Shumway: Maggie, how are you doing today?
• 2:15
  Kary Shumway: Great.
• 2:15
  SPEAKER_01: So happy to be here.
• 2:16
  SPEAKER_01: Thanks for having us.
• 2:18
  Kary Shumway: Absolutely.
• 2:18
  Kary Shumway: And Devin, how's your day going so far?
• 2:21
  SPEAKER_02: Great.
• 2:22
  SPEAKER_02: Happy Friday.
• 2:22
  SPEAKER_02: We got our uh Christmas party later today.
• 2:25
  SPEAKER_02: So yeah, it's gonna be a good day.
• 2:26
  SPEAKER_02: How are you, Carrie?
• 2:28
  Kary Shumway: It couldn't be better.
• 2:28
  Kary Shumway: I'm doing awesome as well.
• 2:29
  Kary Shumway: Thanks so much.
• 2:30
  Kary Shumway: So great to have you guys here.
• 2:32
  Kary Shumway: Uh, we're gonna cover a lot of ground.
• 2:34
  Kary Shumway: But Maggie, why don't you start maybe talk a bit about Leighton, what it is that you guys do, what types of tax and financial services that you provide.
• 2:42
  SPEAKER_01: Sure.
• 2:43
  SPEAKER_01: Always happy to talk about Leighton.
• 2:46
  SPEAKER_01: Um, we are a global financial services company.
• 2:51
  SPEAKER_01: We provide tax credit consulting, and we've got a bunch of offices in Europe, and one common thread through all of our offices in Europe, and then here in the United States and Canada, is the research and development tax credit.
• 3:05
  SPEAKER_01: And the way our business model has evolved is we'll we'll pick when the RD credit becomes permanent in a country, we open up an office, we start doing the RD tax credit, and then we expand with additional services that make sense for that market.
• 3:21
  SPEAKER_01: So in the United States, we now offer cost segregation studies, property tax abatements, mergers and acquisition services, um, and then energy efficiency tax incentives, which there's a a few different ones, which maybe we'll get into if it makes sense.
• 3:39
  SPEAKER_01: Um, but we've become the global leader in research and development tax credit, and we're not far behind with our other services.
• 3:49
  SPEAKER_01: We do everything in-house.
• 3:50
  SPEAKER_01: Um, and we're pretty caught pretty big.
• 3:54
  SPEAKER_01: I think we're at like 3,000 or so employees now.
• 3:57
  SPEAKER_01: Um it's pretty cool.
• 4:00
  Kary Shumway: Very cool.
• 4:01
  Kary Shumway: Yeah, no.
• 4:02
  Kary Shumway: And what I love about this conversation and sharing it with folks is that there's there's money out there, you know, there's tax credits or there's incentives, and a lot of times it's not super easy to figure out whether you qualify or how much or even what these things are.
• 4:17
  Kary Shumway: And you know, we're very reliant on maybe the the tax person who does our, and they may or may not be that familiar with the nuances.
• 4:24
  Kary Shumway: And you know, the audiences, the audience that I serve is is craft breweries, breweries who are relatively small and may not have the resources.
• 4:31
  Kary Shumway: So for someone like Leighton, you can come forward and kind of unlock that.
• 4:35
  Kary Shumway: So I Devin, with that, maybe let's talk about these research and development tax credits.
• 4:40
  Kary Shumway: Like I most breweries I don't think think of themselves as doing research and development.
• 4:45
  Kary Shumway: So maybe just tell us what qualifies as RD in a in a brewery environment.
• 4:51
  SPEAKER_02: Yeah.
• 4:52
  SPEAKER_02: Um, and we we have been giving the spiel for years, ever since we started in the US, that it's not just people in lab coats with with beacons and test tubes and whatnot.
• 5:03
  SPEAKER_02: It's a very broad test that the IRS has had since the late 80s.
• 5:08
  SPEAKER_02: It's it's uh you know been revamped a little bit over the years, but it's it's basically the work has to be done with uh in association with a product or service or formula, invention, technique, software.
• 5:22
  SPEAKER_02: So basically anything associated with your business and how you're trying to make money.
• 5:26
  SPEAKER_02: That's the business component.
• 5:28
  SPEAKER_02: Then there's three other tests.
• 5:30
  SPEAKER_02: And so the first one is technological in nature, the work has to be based in the hard sciences, so not uh, you know, evaluations of uh taste or or color or like people's preferences has to be based in engineering, again, computer science, you know, architecture, whatever the hard science would be.
• 5:51
  SPEAKER_02: Uh, and then the two other key ones there has to be a level of technical uncertainty as to the work being done and a process of experimentation and evaluation of alternatives.
• 6:02
  SPEAKER_02: So basically, as a company, you don't know what you're, you know, how you're gonna go about the solution to the problem or developing of the product.
• 6:11
  SPEAKER_02: There's technical uncertainty as to how to achieve that.
• 6:14
  SPEAKER_02: So you're gonna have KPIs, you're gonna be testing alternatives, basically troubleshooting and doing RD, as you would very generally think about what that means.
• 6:24
  SPEAKER_02: Uh so breweries, I mean, hopefully any owners hearing that would have a bunch of things that come to mind.
• 6:30
  SPEAKER_02: But one of the main ones is just product development, right?
• 6:33
  SPEAKER_02: Whether it be like a new formulation, a new flavor, maybe as a brewery you're pivoting from IPAs to ciders or or a lower ABV, whatever the new product formulation is, that's that's RD in essence.
• 6:47
  SPEAKER_02: You gotta test it, develop it, do test batch runs to see if it if it tastes any good.
• 6:54
  SPEAKER_02: And all that work with within the taste is not aesthetic in nature.
• 6:59
  SPEAKER_02: There is a lot of hard sciences that that goes into that.
• 7:02
  SPEAKER_02: Um, and then on top of that, I mean internal process improvement is a huge one in manufacturing in general.
• 7:11
  SPEAKER_02: Um, you know, digitization of the manufacturing workflow or adding new technologies, adding new equipment, anything that, again, technical in nature, and and you don't know how to get it done.
• 7:23
  SPEAKER_02: It's not figured out before you start with the endeavor.
• 7:27
  SPEAKER_02: So that could be increasing your capacity as a brewery, uh, increasing your efficiency, lowering your cost, whatever was entailed within all that.
• 7:37
  SPEAKER_02: Um, there's a lot of work that has to be done, a lot of testing and a lot of troubleshooting and testing of alternatives.
• 7:45
  SPEAKER_02: So I would say that's the the main couple we see product development, process improvement.
• 7:51
  SPEAKER_02: Then there's there's all types of other stuff that may apply to, even like a custom ERP system or developing their own time tracking system.
• 8:00
  SPEAKER_02: We've seen that a couple times.
• 8:02
  SPEAKER_02: For whatever reason, nothing was available off the shelf for what the company needed.
• 8:07
  SPEAKER_02: Anything you develop yourself, essentially, is is qualified for the most part.
• 8:12
  Kary Shumway: Okay.
• 8:12
  Kary Shumway: Yeah.
• 8:12
  Kary Shumway: So I mean it's very applicable to breweries, right?
• 8:14
  Kary Shumway: They're constantly coming up with new flavors, iterations, um, you know, even branching into new products.
• 8:22
  Kary Shumway: Like you mentioned, cider could be seltzer, could be, you know, non-alcohol, could be low alcohol.
• 8:28
  Kary Shumway: Yeah.
• 8:28
  Kary Shumway: THC is a thing.
• 8:29
  Kary Shumway: I mean, it's there's a lot of a certainty around that, but THC uh infused beverages.
• 8:34
  Kary Shumway: How does someone know?
• 8:35
  Kary Shumway: So you mentioned maybe could you run through the tests again?
• 8:37
  Kary Shumway: Because I think for people who are like, okay, there's tests, I'm a brewery, these real-world examples will resonate with people.
• 8:43
  Kary Shumway: Like, oh yeah, we've been thinking about making a non-alk product, and it's going to take us a while to figure this out.
• 8:47
  Kary Shumway: What are the tests again as it might apply to, you know, if I'm just sort of in common uh language for a brewery owner trying to trying to go through these tests again?
• 8:57
  SPEAKER_02: Yeah.
• 8:58
  SPEAKER_02: Uh so new product formulation, invention technique, you know, that's the first one.
• 9:03
  SPEAKER_02: And and so almost everything a company does is going to be in relation to what they're selling and and trying to do better financially, right?
• 9:11
  SPEAKER_02: Like increase the top line or or increase the bottom line through gaining efficiencies.
• 9:16
  SPEAKER_02: So product process, invention, technique, formula, that's the first test.
• 9:21
  SPEAKER_02: Business component is what the IRS calls it.
• 9:24
  SPEAKER_02: Um, and that has to be technical in nature.
• 9:26
  SPEAKER_02: So based in the hard sciences.
• 9:29
  SPEAKER_02: And so when we talk to a new client, those two are kind of designatedly met.
• 9:34
  SPEAKER_02: Uh, that's why we signed them typically.
• 9:37
  SPEAKER_02: So we're not going to get a ton of uh completely non-qualified, like uh, I don't know, uh soft science education clients where they're just talking to people and formulating like a treatment plan.
• 9:50
  SPEAKER_02: Like there's no real hard science there.
• 9:52
  SPEAKER_02: So, really, the two that we hone in on with the studies are are the last two level of uncertainty, technical uncertainty.
• 10:00
  SPEAKER_02: So you don't know how the work is going to be achieved, and then a process of experimentation.
• 10:05
  SPEAKER_02: So, really, we want to know what did you guys try?
• 10:08
  SPEAKER_02: What were the thoughts as to what was going to be implemented, what was ultimately implemented, what were some of the KPIs that you guys were uh were recording through the work to basically ultimately get to an achieved desired result.
• 10:24
  SPEAKER_02: Um, you know, what were the pitfalls during that?
• 10:27
  SPEAKER_02: We we consider in love technically failed projects where it just wasn't achieved.
• 10:33
  SPEAKER_02: That means uncertainty persisted throughout, you know, it KPIs were never met, the project failed, but the all that is RD.
• 10:42
  SPEAKER_02: So really those those last two uh are what we want to tell the story about.
• 10:47
  SPEAKER_02: Like, what were you guys trying?
• 10:49
  SPEAKER_02: What were you evaluating?
• 10:50
  SPEAKER_02: Did it work?
• 10:51
  SPEAKER_02: What was the ultimate outcome?
• 10:53
  Kary Shumway: Gotcha.
• 10:54
  Kary Shumway: And it sounds like there's a lot of tracking that needs to take place.
• 10:58
  Kary Shumway: I mean, we're recording this towards the end of the year for a brewery that's listening, is like, well, I've been doing this all year.
• 11:04
  Kary Shumway: Like, but I didn't know what how do you typically guide someone maybe to retroactively go back and say, well, here's all the stuff we should document.
• 11:13
  Kary Shumway: How do what do they need to document?
• 11:14
  Kary Shumway: How does that work?
• 11:16
  SPEAKER_02: Yeah, yeah, that's a good question.
• 11:18
  SPEAKER_02: And really, where most of the our study time falls is we're, you know, we're doing a three-year look back.
• 11:25
  SPEAKER_02: For instance, right now, companies could claim back to 2022 and onward, then on a recurring basis.
• 11:31
  SPEAKER_02: So once you kind of go through it as a company the first time, claiming year over year, you know what to expect.
• 11:36
  SPEAKER_02: You're you're gonna know better what to document.
• 11:38
  SPEAKER_02: But looking back three years for a company with very little documentation is is tough.
• 11:44
  SPEAKER_02: Um, so first of all, we do a lot of technical interviews with the stakeholders who can tell us about the work, and that really is exactly what the IRS would do upon an audit.
• 11:55
  SPEAKER_02: They're gonna interview technical stakeholders, and basically, you know, we we always hope that those interviews would corroborate what has been told to us.
• 12:04
  SPEAKER_02: It's just a company telling someone about their work, and so you know, that's that's what we're documenting throughout those interviews, is all the elements of the work that meet this four-part test that help substantiate the claim.
• 12:18
  SPEAKER_02: But basically, the the short of that is that the IRS doesn't expect a company to have readily available documentation looking back three years if they've never heard of this incentive.
• 12:29
  SPEAKER_02: Uh, for example, they also don't require time tracking, reasonable estimates suffice for for the cost allocations in association with these activities.
• 12:39
  SPEAKER_02: So we're really through interviews trying to bolster as as best as possible what the work was was being done at the time.
• 12:47
  SPEAKER_02: And then looking forward, we can we can help companies kind of track that better.
• 12:52
  SPEAKER_02: Um but specifically for breweries, it's a little easier.
• 12:56
  SPEAKER_02: For instance, you will see you know purchases within trial balances or GLs showing, for instance, new materials or the tax return is going to show when a new piece of equipment was purchased.
• 13:09
  SPEAKER_02: Um and you're probably gonna have some sort of log as to batch runs, what materials were used.
• 13:16
  SPEAKER_02: And so if new things were used at X date, that is very indicative that something changed.
• 13:22
  SPEAKER_02: Same with the equipment.
• 13:24
  SPEAKER_02: Um but then mostly, yeah, employee stakeholder interviews, the people who knew and were part of the process.
• 13:32
  SPEAKER_02: It's it's largely kind of documentation on our part through those interviews.
• 13:38
  Kary Shumway: Gotcha.
• 13:39
  Kary Shumway: Okay.
• 13:40
  Kary Shumway: Um, so for Devin or Maggie, what where do you when you're taking on a new client or you're interviewing, or you're possibly um gonna do business with them, where do they typically leave money on the table?
• 13:51
  Kary Shumway: Like where do they misunderstand RD or just are there any kind of common threads there?
• 14:27
  SPEAKER_01: I think a lot of a lot of them just aren't claiming the credit.
• 14:30
  SPEAKER_01: They don't know that this is available to them and or if their CPA hasn't introduced it to them because they're too busy or they don't have the expertise, they just don't take advantage of it.
• 14:41
  SPEAKER_01: Um and then if someone does do a study on their own, like without a specialist firm, they often miss out on the like process improvement, which Devin had mentioned before.
• 14:53
  SPEAKER_01: That we find that when we do like an optimization study, we find that that's usually always left out.
• 14:59
  SPEAKER_01: They don't they don't think of like improving on like making a beer better that was they released in like 2024, making it better for 2025, and like tweaking this and that.
• 15:11
  SPEAKER_01: I don't know exactly what they're tweaking, but um so making those tweaks that's that is RD.
• 15:19
  SPEAKER_01: And then there's also a lot of I think just things that people automatically assume are part of their it is part of their day-to-day.
• 15:27
  SPEAKER_01: Um, but it is RD.
• 15:29
  SPEAKER_01: We hear that phrase like pretty often, like, oh my god, that's RD.
• 15:33
  SPEAKER_01: That's just like part of my business process.
• 15:35
  SPEAKER_01: I do that all the time.
• 15:36
  SPEAKER_01: And we're like, that's awesome because there's money available for you for doing that all the time.
• 15:43
  SPEAKER_02: Yeah, I I would say um within the costs too, it's really just you know, the IRS likes fours, I guess.
• 15:52
  SPEAKER_02: So there's the four-part test, and then there's four cost categories we can we can look at for the credit.
• 15:57
  SPEAKER_02: Um, with breweries, it's really going to be like two to three.
• 16:01
  SPEAKER_02: It's gonna be wages, contractors, and consumable supplies of materials.
• 16:06
  SPEAKER_02: The last category is um quote unquote computer leasing expenses, so server or cloud costs, really with you know software development firms.
• 16:16
  SPEAKER_02: Um, but on what is missed regarding those costs, I would say two main things.
• 16:23
  SPEAKER_02: Um there are three levels of wages that can be looked at and considered for the credit.
• 16:29
  SPEAKER_02: So you can have your direct hands-on performers of of the RD and the work, um, but you can also have support staff andor supervisory staff.
• 16:39
  SPEAKER_02: So if there are you know significant like company stakeholder meetings where it is the conversation is technical in nature, it's all about what the development plan is, what are some of the KPIs going to be, how are we gonna implement this project?
• 16:55
  SPEAKER_02: That does qualify, even if it's not the hands-on people prototyping or or testing a new formulation.
• 17:02
  SPEAKER_02: So those internal meetings really can capture quite a bit of cost if you're talking um CTOs and CFOs and CEOs in a room talking about the project, just not hands-on performing it, that is still qualified.
• 17:17
  SPEAKER_02: And then the other one is on supplies.
• 17:19
  SPEAKER_02: I I alluded to it earlier, but the first batch runs, especially within manufacturing and breweries, even if they end up selling that first batch of a new product because it came out perfectly, there is definitely uncertainty within that first batch production.
• 17:35
  SPEAKER_02: That's essentially a test batch.
• 17:37
  SPEAKER_02: So if it comes out great, then then that's great.
• 17:40
  SPEAKER_02: But the costs of that either way are are fully qualified.
• 17:44
  SPEAKER_02: And that's uh that's something that most people miss uh off the bat until we explain it.
• 17:51
  Kary Shumway: Got it.
• 17:52
  Kary Shumway: Okay, so step one is awareness.
• 17:55
  Kary Shumway: If you're a brewery, you'll most certainly have RD uh opportunity.
• 17:59
  Kary Shumway: And then second is the the tests and how to run through those and uh documentation and whatnot.
• 18:05
  Kary Shumway: And I guess third is where the fun part comes in is the actual filing of the taxes.
• 18:10
  Kary Shumway: So maybe and it may it might be hard to simplify this, but if you say, okay, I'm aggregating all these costs, I'm documenting all these costs, what are we what's a typical amount or how how might that calculation work so somebody could kind of quantify like what kind of credit are we talking about here?
• 18:27
  SPEAKER_02: Yeah.
• 18:28
  SPEAKER_02: Um, so we basically, you know, I ran through those tests or the the costs, the four costs.
• 18:35
  SPEAKER_02: You come up to a research uh total qualified research expense amount per year.
• 18:39
  SPEAKER_02: Um, for most companies, the credit is going to be about 10 to 12 percent of that total per year.
• 18:46
  SPEAKER_02: Um, so you know, I would say most of the brewery clients we've seen, maybe the top line is between three to 10 million, maybe two to 10 million.
• 18:56
  SPEAKER_02: Um, and so I would estimate like in an in a regular brewery where maybe there's several new formulations per year, but you know, they're fairly well established.
• 19:07
  SPEAKER_02: They have their flagships and whatnot.
• 19:10
  SPEAKER_02: Maybe uh, for instance, 250 grand in qualified costs in in any given year, that's gonna yield about a$25,000 credit.
• 19:19
  SPEAKER_02: Um, so you know, call it$50 for this next part.
• 19:24
  SPEAKER_02: Simplicity, say we're doing a four-year study, that's$200,000 that a company could claim retroactively.
• 19:30
  SPEAKER_02: Those past years would would result in refunds if the company was profitable.
• 19:35
  SPEAKER_02: Mainly these are pass-throughs that at least are clients for breweries, so the credit would flow through to shareholders per people's ownership percentages.
• 19:44
  SPEAKER_02: Uh, but like 20 to 50k per year, I would say, is a reasonable estimate for uh for that sort of industry, at least based on what we've seen.
• 19:53
  SPEAKER_01: Okay.
• 19:54
  SPEAKER_01: It ends up being worth it, right?
• 19:56
  SPEAKER_01: Like 25k doesn't seem like that that much money.
• 20:00
  SPEAKER_01: But if you're doing three-year look back, you're getting for those three years that you look back, you've essentially overpaid on your income tax liability.
• 20:09
  SPEAKER_01: So you get a check back from the IRS.
• 20:11
  SPEAKER_01: So that's what, 75k?
• 20:13
  SPEAKER_01: And then moving forward, this will offset your income tax liability each year.
• 20:18
  SPEAKER_01: And then you can start like really building this in as a tax strategy, which is what it's intended to be.
• 20:25
  SPEAKER_01: Um so it ends up being a worthwhile exercise.
• 20:29
  SPEAKER_02: Yeah.
• 20:30
  SPEAKER_02: Uh the the the other thing that can really essentially double that up is depending on what state the company's in.
• 20:36
  SPEAKER_02: Um there's about 32 states that offer credit incentives.
• 20:41
  SPEAKER_02: So most of them work in a very similar way and offset state income tax.
• 20:45
  SPEAKER_02: Some only offset franchise tax or or sales and use tax for, you know, Texas, for example.
• 20:52
  SPEAKER_02: Others are only eligible for C Corps, New Jersey, for example, but most states work in a similar way and are calculated in the same way as the federal.
• 21:01
  SPEAKER_02: So California, for example, all you know, everything would be doubled if they were there.
• 21:06
  Kary Shumway: Gotcha.
• 21:07
  Kary Shumway: And then just to kind of circle back, you had said you can go back three years.
• 21:12
  Kary Shumway: So does that mean so we're recording in 2025?
• 21:14
  Kary Shumway: So they could theoretically, you know, do the calculation, claim the RD for 2025, and then look back to 22, 3, and 4.
• 21:22
  unknown: Okay.
• 21:24
  Kary Shumway: Do you guys do like a an assessment to see if well, I got I'm probably gonna answer my question, but when you go back and look at 22, 3, and 4, are you first assessing whether there's enough to go back and reopen and refile?
• 21:38
  Kary Shumway: Because there's obviously there's some some work in in involved in uh uh amending tax returns.
• 21:44
  SPEAKER_02: Yeah, yeah.
• 21:45
  SPEAKER_02: Um that's what really paramount to our first discussion is getting some tax returns and and evaluating.
• 21:53
  SPEAKER_02: Do you guys want to do this?
• 21:54
  SPEAKER_02: Do you know what you're signing up for?
• 21:56
  SPEAKER_02: Is there tax there?
• 21:57
  SPEAKER_02: Is there enough credit there?
• 21:59
  SPEAKER_02: How many shareholders are there at the company?
• 22:02
  SPEAKER_02: Is this gonna be worth amending returns?
• 22:05
  SPEAKER_02: So that is something we love when CPAs or at least like CFOs or whatever are involved with with our clients to kind of help um inform that decision.
• 22:15
  SPEAKER_02: But we we try to be transparent as possible about is this amendment gonna be worth it for you guys?
• 22:22
  SPEAKER_02: Do you want us to go ahead and and focus on all years available or only certain ones?
• 22:27
  SPEAKER_02: And and that is part of the evaluation process, yeah.
• 22:31
  SPEAKER_02: It's not gonna be worth it for for every company, obviously.
• 22:34
  SPEAKER_02: If it's like a ten thousand dollar credit for a look back year and there's 30 shareholders, it's it's probably just not worth pursuing.
• 22:43
  Kary Shumway: Gotcha.
• 22:44
  Kary Shumway: So let's maybe dig in a little bit more about that process of the initial evaluation.
• 22:49
  Kary Shumway: Um, and so what you just said one of the things you do is ask for proprietary tax returns so you can look it over.
• 22:55
  Kary Shumway: What other types of information would you ask for to kind of make this preliminary assessment to say, oh, I think you know that we've got opportunity for X here?
• 23:06
  SPEAKER_02: Yeah, I mean, that initial assessment.
• 23:08
  SPEAKER_02: So that's basically the way we work is two people on a on a claim, any claim.
• 23:14
  SPEAKER_02: So, me, for instance, I have an accounting background, I would be the financial consultant on a claim, and then we have a bunch of technical consultants uh in their respective backgrounds.
• 23:24
  SPEAKER_02: So engineers, architects, software developers.
• 23:29
  SPEAKER_02: Basically, you know, we can pair any tech consultant with the client in the proper industry so they understand the work.
• 23:37
  SPEAKER_02: So that initial call, we definitely want the tax returns, um, PLs.
• 23:43
  SPEAKER_02: Basically, that's going to give us a pretty good financial look at whether a credit's viable and and useful for a company.
• 23:50
  SPEAKER_02: Um, but then on that call is really we're we're talking about projects at a high level.
• 23:54
  SPEAKER_02: We're explaining the four-part test like I did earlier.
• 23:58
  SPEAKER_02: And we I think I like to think we can gauge pretty well based on the reception of the client after that test and starting to you know brainstorm projects, what the level of RD is going to be at a high level.
• 24:13
  SPEAKER_02: Um, so if they're getting excited, they're rattling off a ton of examples.
• 24:17
  SPEAKER_02: We know there's plenty there.
• 24:19
  SPEAKER_02: It's gonna be a higher kind of assumed qualified percentage, maybe like 30% of eligible costs, versus the rest of our initial call, we're really kind of pulling teeth to get anything out there from the client.
• 24:33
  SPEAKER_02: Like, okay, did you guys do this?
• 24:34
  SPEAKER_02: Did you try this?
• 24:36
  SPEAKER_02: Nothing's coming to mind.
• 24:38
  SPEAKER_02: Maybe we'll estimate like five to 10% qualified on eligible costs.
• 24:42
  SPEAKER_02: And so then it's, you know, we recap with an estimate.
• 24:46
  SPEAKER_02: We think this is going to be your credit range per year, and it's it's obligation free every every time we have that initial call.
• 24:53
  SPEAKER_02: Clients can kind of gauge whether they want to move forward and and go ahead with the study or not after that call.
• 25:00
  Kary Shumway: Gotcha.
• 25:01
  Kary Shumway: And there's been a lot of, I mean, for those who who are familiar or somewhat familiar with RD, there's been a lot of changes over the last year or two or where where are we right now?
• 25:11
  Kary Shumway: Is like whatever changes occurred, is that retroactively changed back?
• 25:16
  Kary Shumway: It's a little confusing.
• 25:17
  Kary Shumway: And how does uh is there a way to kind of simplify where we are now as far as RD goes?
• 25:24
  SPEAKER_02: Yeah.
• 25:25
  SPEAKER_02: Um the you probably you know, Carrie, the Tax Cuts and Jobs Act that had some negative effects on on RD in general.
• 25:33
  SPEAKER_02: So it required that RD costs were capitalized.
• 25:38
  SPEAKER_02: The the credit didn't change, but everything I was talking about as far as those those qualified costs, that 250K, for example, in the old legislation, that would need to be capitalized and amortized over five years.
• 25:52
  SPEAKER_02: So basically, it was forcing companies to not realize those deductions in year one, which is really detrimental to the bottom line, even if you are claiming a credit after that.
• 26:05
  SPEAKER_02: Um, so the the beautiful bill, the one big beautiful bill that was passed in um July, that basically nullified that requirement for for most businesses, um, even retroactively.
• 26:17
  SPEAKER_02: So the requirement was for 22 to 24 tax years.
• 26:22
  SPEAKER_02: The the one big beautiful bill repealed that essentially for companies under 30 million in gross receipts average.
• 26:30
  SPEAKER_02: So that's going to be, you know, most companies we're thinking about um or working with for our capacity.
• 26:37
  SPEAKER_02: If they didn't capitalize initially, they can go ahead and amend those returns as if the rule never existed.
• 26:43
  SPEAKER_02: So ignorance was bliss for them.
• 26:46
  SPEAKER_02: And any companies who did capitalize can amend to uncapitalize, basically undo that treatment of RD costs, or they can accelerate the rest of their amortization expenses next year.
• 26:58
  SPEAKER_02: So it basically has solved the issue.
• 27:01
  SPEAKER_02: Um, and then going forward for tax year 2025 and onward, there is no need to capitalize RD costs.
• 27:09
  SPEAKER_02: It's back to pre-2022 treatment where companies can take their deductions, claim the credit, essentially as the program was intended to immediately help businesses performing RD.
• 27:22
  SPEAKER_02: Got it.
• 27:23
  Kary Shumway: So it's better now.
• 27:24
  SPEAKER_02: Yeah, it's better.
• 27:25
  SPEAKER_02: We were we were having a hard time with it, you know, for the past couple of years.
• 27:31
  SPEAKER_02: Explaining to clients is the first hurdle, convincing them that it was an important area of compliance was another hurdle, and so on and so forth.
• 27:40
  SPEAKER_02: So, yeah, this is better for everyone.
• 27:42
  Kary Shumway: Excellent.
• 27:43
  Kary Shumway: And Maggie, for you, who is like I know there's a certain size of brewery, what's like an ideal client for you guys in this regard, and in and however you would quantify that, whether it's revenue or people, or how do you uh so for folks listening, like how do they know if they fit the bill here?
• 28:00
  SPEAKER_01: I'd say it's usually the easiest marker is employee count.
• 28:03
  SPEAKER_01: I would say like 15, 20 employees is probably the like the minimum, and then anything beyond that, it might maybe you could also think about like number of like new recipes per year, but I don't know if people count that like in a religious state, but everyone knows how many employees they have.
• 28:25
  SPEAKER_01: And the reason for that is because that's the biggest cost category when calculating the credit, so the more wages you're paying out, the higher your likelihood is for a good credit.
• 28:35
  Kary Shumway: Gotcha.
• 28:36
  SPEAKER_02: Yeah, and I I would say profitable is is good.
• 28:40
  SPEAKER_02: You know, you're you're claiming a tax credit, you want you want profit in tax to offset.
• 28:45
  SPEAKER_02: Um, or you can be in a position where you know you're gonna be profitable for the next few years, maybe you weren't, but you want to accumulate as much credit as possible.
• 28:54
  SPEAKER_02: Um, and the last one I would just add would be startups, they're you know, you they kind of circumvent that profitability necessity where there is a payroll election um where you can take the credit to offset payroll tax, pay it on a quarterly basis.
• 29:11
  SPEAKER_02: If you've had sales for less than five years and they're under five million, that payroll election is eligible where um you don't necessarily need to be showing income tax yet, but almost every company is paying payroll tax, and so that's a benefit for them.
• 29:27
  Kary Shumway: Oh, that's interesting.
• 29:28
  Kary Shumway: So we can offset that.
• 29:29
  Kary Shumway: But what say again what the requirement is there, the first within the first five years of operation, they can yeah.
• 29:36
  SPEAKER_02: So it's gross receipts generation.
• 29:39
  SPEAKER_02: Um, so that needs to be, you know, having been in place for less than five years.
• 29:44
  SPEAKER_02: So we would be, you know, company who started sales in 2022, for example, they would still be eligible per that test.
• 29:52
  SPEAKER_02: They would be on year four of gross receipts coming up.
• 29:56
  SPEAKER_02: Um, and then the other criteria is the current tax year where the credit's being claimed.
• 30:01
  SPEAKER_02: Sales have to be less than five million.
• 30:03
  Kary Shumway: Got it.
• 30:04
  Kary Shumway: Okay.
• 30:05
  Kary Shumway: And then beyond that, what happens if they're not, what are they break-even or showing a small loss?
• 30:09
  Kary Shumway: Does that tax credit carry forward or how and how might that work from a pass-through standpoint too?
• 30:16
  Kary Shumway: Since it's a lot of these are LLCs and folks are getting K1s, do they show up on the how might that work?
• 30:21
  SPEAKER_02: Yeah.
• 30:22
  SPEAKER_02: Um, yeah.
• 30:23
  SPEAKER_02: So that would first of all kind of be an assessment.
• 30:25
  SPEAKER_02: Do you want to claim credits to to bank and carry forward?
• 30:29
  SPEAKER_02: The federal RD credit can carry forward for up to 20 years.
• 30:33
  SPEAKER_02: Um, so yeah, that would basically the credit share would flow through per K1s to each owner.
• 30:40
  SPEAKER_02: They would be recorded on Form 3800 uh by the owner CPA on their individual return.
• 30:46
  SPEAKER_02: And that's basically a general business credit that could offset tax in association with the company in the future.
• 30:54
  SPEAKER_02: So the company starts generating taxable income and shareholder tax liability within a couple years, the owners will have that credit already recorded from prior years to utilize right away, whenever that occurs.
• 31:08
  Kary Shumway: Great.
• 31:09
  Kary Shumway: That's awesome.
• 31:10
  Kary Shumway: All right, so we'll put up we'll put a bow on the RD thing for now.
• 31:13
  Kary Shumway: But I think for folks that are listening, it's like it's it's important.
• 31:16
  Kary Shumway: It could be real money for you.
• 31:18
  Kary Shumway: And you guys do most of the lift, you know, provided it's a it's a good fit.
• 31:22
  Kary Shumway: Um, but but for those that might be smaller, you know, talk to your tax person.
• 31:27
  Kary Shumway: Are you claiming the credit?
• 31:29
  Kary Shumway: You know, do they are they aware of it, you know?
• 31:31
  Kary Shumway: So that's really the the first step here is just raising the awareness that you know it could be a real benefit.
• 31:36
  Kary Shumway: Um, so let's shift and just kind of as we the last, you know, kind of winding down here, let's talk a little bit about energy efficiency upgrades.
• 31:44
  Kary Shumway: Because this is important for uh a lot of breweries I know that are listening and can be a big focus.
• 31:49
  Kary Shumway: So, you know, boilers and chillers and HVAC and lighting and so what are the tax incentives that exist right now for maybe making more sustainable investments?
• 32:02
  SPEAKER_01: Um so this is primarily for for those own those breweries who own their buildings.
• 32:09
  SPEAKER_01: Um, and a good rule of thumb is if your your CPA has recommended you do a cost segregation study, it probably means you should also take a look at 179D.
• 32:18
  SPEAKER_01: I think most people are familiar with COSEG, but people are not as familiar with 179D.
• 32:24
  SPEAKER_01: It's pretty sweet credit, it rewards you five dollars a square foot for making improvements to the HVAC, the lighting, the exterior of the building.
• 32:37
  SPEAKER_01: Um and it's not necessarily it doesn't necessarily include like the like using an energy efficient boiler, but if that's connected to like the the HVAC and the HVAC needs in turn needs upgrading for that, they kind of end up going hand in hand.
• 33:00
  SPEAKER_02: So anything you want to add there, Devin to No, I would add that uh maybe it's evident that we have experts other than us for for this incentive.
• 33:11
  SPEAKER_02: Um we kind of know it at like a high level, but like Maggie said, it is a it's basically an extra deduction up to five dollars per square foot.
• 33:21
  SPEAKER_02: Um, you know, LED lighting, HVAC, any like energy efficient upgrades for the most part, um, the the cost of those can be accelerated and added to as far as the deduction goes.
• 33:34
  SPEAKER_02: Um and and so really like along with the cost segregation, which is more broad.
• 33:41
  SPEAKER_02: Um, so we kind of say like if you have if you own the building, if there's been any significant improvement, additions, renovations to the tune of maybe over a couple hundred grand, um, it's probably likely that some of that will qualify for both, you know, everything's gonna qualify for cost segregation, but there's probably gonna be some 179D eligible costs as well.
• 34:05
  SPEAKER_02: And so you're basically either accelerating your deductions a ton on what you can depreciate within that building.
• 34:12
  SPEAKER_02: It's typically 30 years, but you can accelerate a lot of that through cost segregation, and or you're gonna have extra deduction eligible within that 179d energy efficient realm.
• 34:23
  SPEAKER_02: So it's it's worth talking to our experts, not us personally, but uh yeah.
• 34:28
  Kary Shumway: No, that's great.
• 34:29
  Kary Shumway: Yeah, no, I think it's just another example of hey, there's there's credits, there's incentives, there's money out there, we just need to figure out how to unlock it.
• 34:37
  Kary Shumway: And you know, first step is again just sort of awareness of that, and then step two is who are the people that can help?
• 34:44
  Kary Shumway: And obviously that's you guys.
• 34:45
  Kary Shumway: So I think with that, if people are listening and they're like, all right, yeah, I'm I'm I'm equal parts uh you know, interested and confused because I think that's generally what people are like, oh that sounds like what did he say?
• 34:58
  Kary Shumway: Um how if someone's interested and wanting to get in touch with you, what's the best way for them to do that?
• 35:04
  SPEAKER_01: They can go to our website, of course, and like fill out a form, or they can contact us directly.
• 35:10
  SPEAKER_01: I think that's probably a a better method.
• 35:12
  SPEAKER_01: My email is mcrowley at Layton.com.
• 35:17
  SPEAKER_01: Maybe we can like put it, type it somewhere in this podcast.
• 35:21
  Kary Shumway: We can do that.
• 35:22
  SPEAKER_01: Okay, so we'll do that.
• 35:24
  SPEAKER_01: Um, but yeah, or call, just give me a ring, whatever mode people prefer.
• 35:30
  SPEAKER_02: Yeah, LinkedIn is good.
• 35:32
  SPEAKER_02: I know our website uh has a little calculate your potential credit yourself sort of tool.
• 35:38
  SPEAKER_02: So website has a lot of good articles, legislative updates, um, and you can certainly go go through there to inquire, if nothing else.
• 35:47
  Kary Shumway: That's great.
• 35:48
  Kary Shumway: So maybe just from one one thing from each of you, like what's one next step that maybe a brewery owner should take after listening to this?
• 35:56
  Kary Shumway: Is there any one action item you could provide them or one thing they should do?
• 36:00
  Kary Shumway: Devin, let's start with you.
• 36:01
  SPEAKER_02: Yeah.
• 36:02
  SPEAKER_02: Um, for the owner or anyone with access to the company returns, um, you like you said earlier, Carrie, just open it up and check if if you've claimed.
• 36:13
  SPEAKER_02: I would say that would be one of the first things.
• 36:15
  SPEAKER_02: Um, and if you weren't aware that you did claim, then the second step would be like contacting your CPA and asking what the hell did we claim?
• 36:24
  SPEAKER_02: Um but you know, look at look for 6765.
• 36:29
  SPEAKER_02: That's the RD form.
• 36:30
  SPEAKER_02: See if it's on there, it it probably isn't gonna be.
• 36:34
  SPEAKER_02: Um, and then just think about your tax situation and whether an income tax credit would would help the company.
• 36:40
  SPEAKER_02: It very likely would.
• 36:41
  SPEAKER_02: Um, and so if both of those are met, you you have four years of potential credit on the table to to go ahead and claim ASAP.
• 36:49
  Kary Shumway: 6765.
• 36:51
  Kary Shumway: So I'm guessing most people would be like, I don't even know.
• 36:53
  Kary Shumway: So that that is a great first step, though.
• 36:55
  Kary Shumway: Just if it's not there, you may just out, but it's not too late.
• 36:59
  Kary Shumway: That's great.
• 37:00
  Kary Shumway: Yeah, control F 6765.
• 37:02
  Kary Shumway: Nice.
• 37:03
  Kary Shumway: And Maggie, how about for you?
• 37:04
  Kary Shumway: One maybe one next step, one piece of advice for folks listening.
• 37:08
  SPEAKER_01: I think I'll go the advice route.
• 37:10
  SPEAKER_01: I think a lot of people, like even if they listen to this podcast, will be like, uh, okay, that was a lot of like big words that I don't know what they mean.
• 37:19
  SPEAKER_01: I don't have time for this, if I'm too busy with my beer and growing my business.
• 37:24
  SPEAKER_01: But I would just take pause.
• 37:26
  SPEAKER_01: Like, we're here to simplify stuff and make it easy.
• 37:31
  SPEAKER_01: So if if you own a brewery, if you're trying new things, you should probably have a phone call with us to discuss whether you can take advantage of this tax credit because it is intended to help grow your business, obviously, from a financial perspective.
• 37:48
  SPEAKER_01: It's supposed to help put cash back into your business so you can hire hire people um or buy equipment or do whatever you want with the money.
• 37:56
  SPEAKER_01: But um, so I wouldn't a lot I think a lot of people automatically disqualify themselves.
• 38:02
  SPEAKER_01: Don't do that.
• 38:03
  SPEAKER_01: Let us do that.
• 38:04
  SPEAKER_02: Yeah.
• 38:05
  SPEAKER_02: I I would add one more thing, which maybe would be more fun for for potential uh brewery prospects.
• 38:11
  SPEAKER_02: It would just be to talk to your head formulator or or head brewer, whoever it may be, and just ask, like, what have we done new over the past few years?
• 38:21
  SPEAKER_02: Maybe maybe the C-suite is you know a little far removed sometimes, but like, what have we been doing?
• 38:27
  SPEAKER_02: What have we been working on?
• 38:28
  SPEAKER_02: Have we done a ton of new formulations?
• 38:30
  SPEAKER_02: Have we changed the way we we process things?
• 38:33
  SPEAKER_02: If you start or if they start rattling off a ton of things, then that just means there's there's a big potential there, and it'll kind of get personnel thinking about uh the work that that qualifies and get people excited about it.
• 38:47
  Kary Shumway: Love it.
• 38:47
  Kary Shumway: It's great stuff.
• 38:49
  Kary Shumway: Maggie and Devin, thank you so much for your time and really appreciate it.
• 38:52
  Kary Shumway: We'll put all the uh contact information in the show notes so people can get in touch.
• 38:55
  SPEAKER_01: Perfect.
• 38:56
  SPEAKER_01: I don't think I did a good job describing it.
• 38:58
  Kary Shumway: No, you did just you did just fine.
• 38:59
  Kary Shumway: Thanks so much, uh, both of you for your time and expertise.
• 39:03
  Kary Shumway: Thank you for listening to the Kraft Brewery Financial Training Podcast, where we combine beer and numbers so that you can improve financial results in your brewery.
• 39:11
  Kary Shumway: For more resources, tools, guides, and online courses, visit Craft Brewery Financial Training dot com.
• 39:18
  Kary Shumway: And don't forget to sign up for the world famous Craft Brewery Financial Training newsletter.
• 39:23
  Kary Shumway: Until next time, get out there and improve financial results in your brewery today.