How innovation and R&D can positively affect a US dairy company’s bottom line

By Brad DeNoyer and Wendy Landrum, Baker Tilly Virchow Krause, LLP

- Last updated on GMT

US dairy companies are able to take advantage of R&D tax credits. Pic: ©iStock/anyaivanova
US dairy companies are able to take advantage of R&D tax credits. Pic: ©iStock/anyaivanova
The ever-changing needs and wants of consumers due to their access to information on nutrition has dramatically altered how dairy companies approach product offerings.

The combination of their growing health consciousness and interest in trying new and different products to consume have led the public to learn more about what they put into their bodies.

These efforts by consumers to develop a better understanding of what they consume has also left dairy companies of all types and sizes scrambling to re-evaluate their offerings and answer one critical question: How does what my company make compare with the general public’s needs, wants and expectations?

More consumers than ever before desire to make smart, informed decisions about what they eat and drink on a daily basis, and they are demanding dairy companies to be more creative and innovative.

From unique product offerings to more contemporary branding and packaging, the pressure is on dairy companies to answer the call to innovate.

Taking the risk

Putting in the requisite time, energy, resources and capital to craft new and unique offerings to better meet the demands of the buying public can ultimately lead to added costs and complexity, as well as the potential for failure.

However, does the prospect of increased revenue and market share make any such risks worthwhile? Unequivocally, yes.

No legitimate effort to innovate can occur without incurring substantial research and development (R&D) costs. As a result, organizations must possess a strong understanding of how to organize their resources to most effectively engage in R&D activities to gain significant financial benefit.

R&D tax credits

One way, for example, is through claiming R&D tax credits offered by the federal and state governments that may offset some of the expenses associated with their innovation efforts.

The R&D tax credit allows companies that perform technological research to receive tax benefits related to certain research activity performed in the United States.

In December of 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the R&D tax credit permanent, eliminating its uncertainty. With a permanent R&D tax credit, dairy companies plan long-term investments in R&D and innovation with greater ease.

Therefore, engaging an organization well versed in the landscape of R&D tax credits is now even more critical toward securing any and all available credits to offset expenses associated with R&D.

Four-part test

The R&D tax credit is available to any organization developing new or improved products, systems or processes. In order to secure it, an organization must be able to substantiate that the R&D activities meet the requirements of the “four-part test.” It is as follows:

  1. The activity must be technological in nature -- based on the principles of a hard science, including engineering, computer science, physical science or biological science.
  2. The activity must be for a permitted purpose involving the creation of a new or improved level of function, performance, quality, reliability, durability or cost reduction.
  3. The activity must involve the elimination of uncertainty and must explore what is not known at the start of the project. The activity should explore uncertainties related to the capability (can we develop it?), methodology (how will we develop it?) and design (what is the appropriate design?).
  4. The activity must involve a process of experimentation in order to eliminate the uncertainty present in the third requirement. This may include evaluating one or more alternatives, performing testing or modeling, examining and analyzing hypotheses, or refining or abandoning hypotheses.

Increased cash flow

A company’s activities need to meet each of the above four criteria in order to include the associated costs in the calculation of the R&D tax credit. The federal R&D credit generally equates to about 5 to 7% of eligible R&D expenses.

The largest of the eligible expenses is often the wages of the employees directly performing qualifying R&D activities. Costs incurred for supplies utilized or consumed during development, as well as certain payments to outside parties for design, development or testing services also qualify. In addition to the federal credit, many state jurisdictions have similar R&D credits available.

The smartest dairy companies are working diligently to leverage any potential opportunities to obtain R&D tax credits, all while creating products consistent with perpetually changing customer preferences.

Proper consideration of the R&D tax credit as it relates to these activities may result in increased cash flow, optimization of engineering investments and a reduction in tax liability.

Brad DeNoyer, is a partner at Baker Tilly Virchow Krause​, LLP and Wendy Landrum, is a partner and R&D practice leader in national tax services, Baker Tilly Virchow Krause, LLP

Related topics: R&D, Dairy Health Check