The R&D Tax Aspects of Chocolate Products and Processing Innovation



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Chocolate-Innovation
        Chocolate is a beloved sweet around the world - consistently sparking the imaginations and insatiable demands of chocolate lovers. Chocolate comes from cacao beans, whose crops are threatened by age, disaster, and disease.  Recently, economic threats to chocolate producers have prompted high-technology solutions and research into improving upon and innovating every element of chocolate production from bean to bar. These innovations, including a range of fields from machinery to genetics, may qualify for federal and state R&D tax credits.   


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

•    New or improved products, processes, or software
•    Technological in nature
•    Elimination of uncertainty
•    Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 19, 2014, President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year.


Chocolate: From Bean to Bar

        Chocolate begins as a bean from fruits of a Cacao tree. After being harvested, the fruits are cut open and the beans are taken out and spread out to naturally dry before roasting. After being dried, the beans are given a simple cleaning, bagged, and then shipped to a refiner or a bean-to-bar chocolate maker. The beans are further cleaned of debris and then roasted. The roasted beans are then "cracked" and winnowed by a mechanical process where the meat of the beans are separated from the lighter shells.

        The winnowed beans are then rolled or crushed until they become a paste. This process may take days depending on desired qualities and may involve different types of machines - both industrial and artisanal. The resulting chocolate liquor is then mixed and heated with added elements or flavors. The chocolate is then cooled during and after being poured into molds. It is common during this pouring and cooling to use specialized machines to coat confectionaries with chocolate or decorate them. The chocolate product is then packaged and shipped.
 

The Future Needs of Chocolate

        Each industry involved in chocolate products faces several challenges. Social, economic, and environmental issues all contribute to threats that may harm the industry. Currently, cacao trees only grow in specific climates and are cultivated and harvested by local farmers, which creates instability in the supply of cocoa beans. The principle regions that harvest cacao trees are South America, Western Africa, and Southeast Asia. 5 million farmers and a total of 40 million people directly depend on this productivity, which is often disrupted by political instability, disease, pests, depleted soil, and age.

        In order for the world to continue enjoying chocolate, innovations will be necessary to expand and secure supplies of cocoa beans. This can be accomplished by combating destructive pests and disease, breeding new types of trees, educating and training farmers in new techniques and processes, revitalizing existing crops that have suffered from harm or age, and creating policies and practices that certify sources are socially and environmentally responsible.
Chocolate producers’ ongoing investment in R&D is substantial. Below is a table of book per capita expenses in R&D for Chocolate Manufacturers:

Book per Capita: Chocolate
              Manufacturers



Innovations in Chocolate Products & Production

        Like many natural products of plants and animals, chocolate is being studied closely at the biological and genetic level. Several companies are finding ways to create innovations in the chocolate production chain from the farms where beans are grown to the sales floor where it is sold. In addition, companies and organizations are developing practices towards sustainability and providing stability for farmers in regions where cacao trees grow.    


Cacao Biotechnologies, Inc. - Brooklyn, NY 
    

Cacao
            Biotechnologies

        Cacao Biotechnologies is committed to taking plant-based nutrients and creating new applications for them in pharmaceuticals, skin care, and other human health and disease treatments. Through studying and making use of the whole cacao tree, Cacao Biotechnologies hopes to create new products and applications. Their research and development efforts - along with an intellectual property portfolio of 41 pending and issued patents - are aimed at producing and propagating high-value cacao varieties to meet the future economic and environmental needs of the world. Cacao Biotechnologies has strategic partnerships with cacao farms, university research labs, and biopharmaceutical experts. 



Mars, Inc. - McLean, VA
      

Mars Center for Cocoa Health
            Science        Mars is the largest worldwide producer of chocolate products and has three comprehensive strategies in place to secure its supply and value chains and improve its sourcing. First, it wishes to certify its entire cocoa supply - a move that would standardize and provide insight into quality conditions and improving productivity. As of 2015, Mars has certified about 30% of its supply and has a target of 100% by 2020. Second, it wishes to conduct breakthrough research in improving cacao tree breeding, farming methods, and protection against pests and disease. In addition, it wishes to empower its sources of beans by providing the technology and knowledge they need to triple their productive yields.  

        Mars has also contributed to efforts with its partners to map the cocoa genome, which provides scientists and biologists a vital tool in creating better breeds of the cacao tree. The Mars Center for Cocoa Health Science studies the nutritional value and benefits of cocoa flavinoids.  


Astor Chocolate - Lakewood, NJ   
   

Astor
            Chocolate

        Astor Chocolate brings to market innovative, award winning packaging designs combined with quality, artisanal Belgian chocolate. Using 3D Design and printing to advance product designs, Astor Chocolate is following the trend of premium, gourmet chocolates that combines high-quality food with high-quality presentation. Astor Chocolate's packaging features different shapes and materials, including a ‘Chocolate Chess’ set complete with board and pieces.  


TCHO, Inc. - Berkeley, CA

            TCHO New
            American ChocolateTCHO is innovating chocolate products to meet the demand trends of premium chocolates with Certified Fair Trade and Organic sourcing. Many of THCO's packaging choices are interesting and unique from normal bars and wrappings; Jars, clear cases of stacked bars, and squares with bright designs show off unique chocolate from sustainable and certified sources. In addition, TCHO engages in educational sessions to increase quality of their source's beans as well as bring quality and product expertise out to the distant fields from which they source beans.   


Cacao Prieto, Inc. - Brooklyn, NY

        Cacao PrietoCacao Prieto (also known as Brooklyn Cacao) is a premium chocolate maker in Brooklyn, New York that creates and uses specialized and unique machinery to produce their products. Of these machines is one they invented themselves - a vortex winnower. Roasted beans pass through a two stage mill and are then passed into a pneumatic tube, where a vortex begins blowing over them in a swirling stream of air. The kinetic energy of the husks is different than the energy of the nibs (the meat of the beans) and thus are conveyed outward of the system, while the nibs move on. This method creates very high separation of nibs from husks and ensures the purity of the future chocolate liquor. Moreover, this swirling air vortex system allows for complete and easy collection of the husks, which are recycled for use as natural fertilizer.   
   

Conclusion

        Chocolate product manufacturers face environmental, social, and economic challenges in order to continue succeeding while meeting worldwide demand, and all of the technological innovations that are emerging are the result of hard work in research and development.  The activities described above may qualify for both federal and state R&D tax credits.


Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.

Adam Starsiak is a Tax Analyst with R&D Tax Savers.


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