The research and development credit (R&D Credit) for a restaurant?  It sounds scientific, only for people in white lab coats inventing the next widget, right?  WRONG!  Restaurants are constantly opening and evolving.  An integral part of that evolutionary process is research.  Researching a new dish, a new menu or a new concept qualifies.  The U.S. tax system seeks to reward this type of innovation through the R&D credit.

What qualifies as research? In short, research is the process of trial and error to create a new or improved business component.  Trial and error in the restaurant industry could include taste testing that new cupcake recipe, yum!

What expenses qualify? The expenses that generate the credit are wages, supplies and contract research.  Wages can be allocated based on the amount of time spent conducting research.  For example, a chef that spends 4 hours per week experimenting with new food offerings could have 10% of his wages qualify for the credit.  Supplies include the various ingredients used or consumed during the research process.

How much is the credit? The credit amount can range between 4% and 20% of your eligible expenses.

Why is a credit better than a deduction for these expenses? A credit can save you taxes dollar for dollar versus a deduction that only saves you a percentage of dollars based on your tax rate.  For example, a $1,000 credit can save you $1,000 while a $1,000 deduction could save you $350 if you are in the 35% tax bracket.  Certain states, including Illinois, also offer their own version of the R&D credit to offset state income taxes.

The R&D credit is very beneficial but has specific rules and restrictions so please contact me at [email protected] or 312.670.7444. to discuss how your business can take advantage of it.