The R&D Tax Credit Aspects of Craft Beer



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Craft-Beer

        Some call it the beer renaissance. Others say it is part of a wider change in consumer taste and a shift toward the “premiumization” in consumer goods. Whatever the explanation, the fact is that Americans are increasingly captivated by craft beers. The present article will discuss recent trends in the craft brewing industry and present the R&D tax credit opportunity available to support innovative craft brewers.


The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent 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 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against $250,000 per year in payroll taxes.


Small, Independent, and Traditional

        The Brewers Association, a Boulder, Colorado-based organization that gathers more than 2,500 members, defines craft brewers using the following three adjectives: small, independent, and traditional.

        In practical terms, this means that craft brewers have an annual production of 6 million barrels or less. Less than 25 percent of their businesses is owned or controlled by an alcoholic beverage industry member that is not itself a craft brewer. And the majority of their products derive from traditional or innovative brewing ingredients and their fermentation.  

        The craft beer market includes the following different segments:
    
I.    Microbreweries, which produce less than 15,000 barrels (17,600 hectoliters) of beer per year with 75 percent or more of their beer sold off-site.

II.    Brewpubs, restaurant-breweries that sell 25 percent or more of their beer on site.

III.    Regional Craft Breweries, independent regional breweries with a majority of volume in “traditional” or “innovative” beer(s).
 

The U.S. Craft Beer Market

        Increasing demand for high-quality, full-flavored beers have made craft breweries a vibrant and flourishing economic force. In 2012, small and independent craft brewers contributed $33.9 billion to the U.S. economy and provided more than 360,000 jobs.  

        Data from the Brewers Association shows that sales of craft beers registered a 17.6 percent increase in 2014, in comparison to only 0.5 percent increase for the overall beer market. Overseas exports of craft beer have also escalated, up 36 percent from 2013 levels.  

        In fact, the world’s thirst for U.S. craft beers has never been higher. American brewers now export to countries whose beer styles they once tried to emulate. In a recent contribution to the Financial Times, Bob Pease, President of the Brewers Association, pointed out that “Thirty years ago, US beer in terms of flavor was pretty much considered a joke – an industrial lager. [European] countries did not take American beer seriously. American craft brewers have changed that.”

        The following table, based on data from the Brewers Association, shows the evolution in the number of breweries in the U.S.:


U.S. Brewery Count

 

2012

2013

2014

% Change 2013-2014

Craft

2,401

2,863

3,418

+19.4%

Regional Craft Breweries

97

119

135

+13.4%

Microbreweries

1,149

1,464

1,871

+27.8%

Brewpubs

1,155

1,280

1,412

+10.3%



        This recent growth in craft brewing can be largely explained by a change in consumers’ taste. Beer drinkers seem to have woken up “to the pleasures of subtle, carefully crafted flavors.”

        Craft breweries are present all over the country. In 2012, the top five states in craft beer output were:

  1. California with $4.7 billion;
  2. Texas with $2.3 billion;
  3. New York with $2.2 billion;
  4. Pennsylvania with $2 billion; and
  5. Colorado with $1.6 billion.


Challenges Ahead

        The unprecedented growth of the craft beer industry comes hand-in-hand with its own set of challenges. Among the most prominent obstacles is competition, both at the national and international levels.

        As a tsunami of new players enter the market, it is increasingly difficult to differentiate one’s product and to create a loyal client base. Faced with so many options, craft beer lovers fail to commit to a particular brand. They rather try the latest than go back to what they already know.

        In addition to the growing number of craft breweries, there is competition from traditional companies who have invested in their own versions of “craft-like” beers, such as MillerCoors’ Blue Moon and Anheuser-Busch’ Shock Top.  

        In this highly competitive scenario, success stories are often outnumbered by companies that are unable to see a profit. Breweries must often face a suite of operational challenges, including distribution, limited shelf-space and taps, along with varying ingredient prices.

        The consolidation of a national presence is also a major challenge to craft brewers. Unable to expand operations, many breweries are doomed to share their restricted, local markets with a growing number of newcomers.

        Finally, despite the positive context surrounding craft brewers, the lack of education about how approachable, food-friendly, and tasteful their products are remains an obstacle to a more widespread consumption.

        New craft breweries should engage an R&D tax credit service provider with a fee deferred start-up program.


Brewing Innovation

        With regards to the many challenges facing craft brewers, Bryan Simpson, PR director for Colorado-based New Belgium Brewing Company, states that “the biggest way to stay relevant is by pushing yourself to innovate.”   In fact, long-term success in the craft beer market seems to be directly related to the capacity of keeping up with the fast-paced creativity and innovation that are at the very essence of this industry.

        Two areas stand out when it comes to craft brewing innovation trends:


I.    Beer Styles and Product Innovation

        With a pronounced and unique flavor profile, India Pale Ale (IPA) is the fastest growing craft beer style. The bitter, hoppy IPA currently accounts for 21 percent of all craft beer sales by volume and experts believe it will experience continued growth.  

        This positive prospect has encouraged innovation within the category, which includes the development of Session IPAs. Consisting of low-alcohol versions of traditional IPAs, Session IPAs can be seen as an effort to compete with the light lager category, which gather the top four beers in the country - Bud Light, Coors Light, Budweiser, and Miller Lite.

        Among the biggest U.S. craft brewers, at least five already produce year-round Session IPAs, namely, Boston Beer Co., Lagunitas, Duvel Mortgaat, and Stone. An increasing number of brewers are offering seasonal editions.  
    
        Another important trend in craft beer styles is the expansion of sour beers, which feature intentionally acidic or tart taste. Similar to wines, this category of beer is extremely food-friendly and has therefore attracted a growing number of consumers. For many, the distinct nature of sour beers represents a change in perspective of what beers can actually be.

        Sour beers can vary considerably in flavor profiles, both through the strain of souring bacteria present and the way they are introduced. Fruits and other additives contribute to an even wider range of possibilities, opening the way for virtually endless innovation.  

        Gluten-free is yet another promising area for craft beer innovation. According to the National Foundation for Celiac Awareness, approximately 1 percent of Americans have celiac disease.  Market research firm Mintel estimates that annual sales of gluten-free products increased 63 percent between 2012 and 2014, reaching $8.8 billion.  

        Traditional beer is listed among the top beverages to be avoided by those suffering from gluten allergy or intolerance due to the presence of certain ingredients, such as barley and wheat. However, innovative gluten-free beers are multiplying, made by either a chemical process that reduces the level of gluten in barley malt, or with alternative ingredients, such as millet, rice, sorghum, buckwheat, and corn.

        Craft brewers are well equipped to tap into the growing gluten-free market. Their challenge is to encounter the best formula, capable of satisfying the thirst of celiac consumers while attracting the attention of curious ones. Milton, Delaware-based craft brewer Dogfish Head entered the gluten-free market in 2011. The company’s Tweasonale beer is based on a mix of sorghum, buckwheat honey, and pureed strawberries. According to Brewmaster Sam Calagione their product has been so successful that “many of the ale’s purchasers don’t follow a gluten-free diet and simply try it out when they see it at a store or bar.”

        Craft brewers willing to enter the gluten-free segment must adapt their production processes and facilities. Attention to the risk of contamination and compliance with labeling regulations are key to navigating this promising market.

        Product innovation is at the heart of the craft beer industry.


II.     Packaging and Labeling

        In a market where customer loyalty is scarce, producers cannot rely on quality to be the sole differentiator. Breweries must catch consumers’ eyes, make them notice their beers. To this end, various companies are redesigning their packaging. Examples include California’s Firestone Walker, Ballast Point, and Green Flash; Utah’s Uinta; Pennsylvania’s Weyerbacher; Minnesota’s Summit; Indiana’s Upland; and North Carolina’s Lonerider and Natty Greene’s.

        In an effort to stand apart, New Belgium, U.S. fourth largest craft brewer, has also resorted to changes in packaging.  Unveiled in 2014, the innovative design re-imagines the company’s iconic and playful watercolor imagery, presenting a colorful and contemporary look.

        Innovative labeling is an important tool in obtaining new drinkers. In the words of New Belgium’s PR Director, “New labels provide people with a reason to give a beer a second look and perhaps try something they’ve walked past for years.”

        Besides creative labeling, an important trend in craft beer packaging is canning. The craft can revolution began in 2002 when Longmont, Colorado-based Oskar Blues Brewery started offering its flagship Dale’s Pale Ale in 12-ounces cans. Over thirteen years later, there are currently 2,486 canned beers of 96 different styles produced by 512 breweries all over the U.S., according to the website, craftcans.com.

        This packaging option, though unorthodox for beers, offers various advantages, including ease-of-use in outdoor spaces, protection against light damage, and reduction of shipping costs due to lower weight.

        Important advances have been necessary to help overcome the perception that cans affect the taste of beers or that cans are simply not where you find high-quality beers. Now that acceptance is higher, craft brewers are turning towards canning innovation. This is the case for the pioneer Oskar Blues, which introduced cans with re-sealable caps and were the first U.S. brewery to sell nitrogenated beer in cans. Also based in Colorado, Hall Brewing not only sells canned beer, but also offers canned mix packs, which have been warmly welcomed by consumers who want to try different craft beers.

        In a groundbreaking effort to take advantage of canning technology, Boulder, Colorado-based Upslope Brewing Company has created the Barrel Aged Brown Ale. Available in 19.2 ounce cans, the beer is designed to be stored and enjoyed months or even years after its production, as it matures and gains character. It is a canned beer you can age.

        One-way kegs are also gaining increased attention among craft brewers. They can be blow-molded and filled for a single use, therefore replacing expensive and heavy stainless steel kegs, which have long been the standard for the industry.  Like other pieces of equipment in the brew house, metal kegs constitute an investment and therefore generate responsibilities concerning maintenance, storage, etc. One-way kegs alleviate these responsibilities and help save time and reduce overall expenses, particularly when there are long distances between the brewery and the bars.

        Louisville, Kentucky-based Against the Grain Brewery has implemented one-way kegs to meet part of its shipping needs. In addition to lowering up-front costs, from $60-$100 for a 30 liter steel keg to $24 for the one-way ones, the change has reduced both the time and money spent in waiting for kegs to be returned. The company is also saving the chemical, labor, water, and energy previously used for cleaning steel kegs before filling.  

        One-way kegs are also an interesting solution for those willing to tap into the overseas market, particularly in a scenario of growing international interest in U.S. craft beer.

        The most prominent one-way keg producers are headquartered in Europe, including the Dutch KeyKeg, which has offices in Chicago, Illinois and is the supplier for Against the Grain. The success of these companies sheds light on an interesting opportunity for brewing-related innovation in the U.S.


Conclusion

        These are very exciting times for American craft brewers. Unprecedented demand promises to reward those investing in innovation as a means to stand out in an increasingly competitive market. Federal and state tax credits are available to support innovative efforts in the craft beer industry.

Article Citation List

   


Authors

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

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

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


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