The restaurant industry today is innovating more than ever—whether developing trendy menus, improving food preparation processes or implementing technology to streamline operations and enhance the customer experience. What many restaurant owners and operators don’t realize is that these efforts may qualify for valuable research and development (R&D) tax credits, representing an opportunity to significantly reduce tax liability and improve cash flow. 

What Is the R&D Tax Credit?

Introduced in 1981 to incentivize innovation and promote economic growth, the R&D tax credit generally applies to expenses incurred during qualified research, such as in developing a new product or process or improving an existing product or process. The research must include a process of experimentation to improve function, performance, reliability or quality, or significantly reduce costs. 

The credit provides a dollar-for-dollar reduction in your restaurant’s tax liability, resulting in fewer taxes owed. Generally, businesses may see 6% to 12% of qualified research expenses returned as tax credits. For smaller and startup restaurants, (under $5M in gross receipts, less than five years old) credits can also be used against payroll taxes up to $500,000 per year.

What Does and Doesn’t Qualify as Restaurant R&D

Your new restaurant product or process doesn’t have to be a new invention. Rather, it must be new to your business (something you’ve never done before). For the restaurant industry, that can mean examples such as:

• Experimentation to add to or improve upon menus, including ingredient substitutions to address costs, trends, specialized dietary demands, etc. (Note that taste testing during the process specifically does not qualify as an R&D expense).
• Technology development, such as the creation of food delivery or tracking applications or internal software that improves workflow and operational performance.
• Innovations to improve food safety, preservation and sanitation processes.
• Improvements tied to technical outcomes of food packaging solutions, such as use of eco-friendly or anti-spoilage materials.
• Testing cooking or preparation techniques for outcomes such as improved efficiency, quality, consistency or scalability. 

In contrast, activities that generally don’t qualify as R&D expenses include:

• Routine cooking or standard menu changes.
• Cosmetic menu updates or seasonal swaps without experimentation.
• Staff training or general operational improvements.
• Market research or customer surveys when not conducted in conjunction with your experimentation process.

As for what costs are eligible during your R&D activities, examples for restaurants include:

• Wages tied to R&D activities (chef and staff involved in your experimentation).
• Ingredients and supplies used during testing.
• Contractor costs, such as consultants and food scientists, expended during the process.
• Depreciation on equipment purchased for experimentation purposes.

Note, the product or process doesn’t have to ultimately be successful to qualify; costs spent testing new recipes or processes that may have failed still qualify as R&D expenses.

Qualifying Restaurant Criteria Checklist

If your restaurant aims to pursue R&D tax credits, here are key questions to help you identify qualifying activities based on the IRS’s four-part test (technological uncertainty, technological in nature, process of experimentation and permitted purpose):

1. Does your activity involve creating or improving menu items, cooking processes, kitchen workflows, food preparation techniques or technology used in operations? (Example: Developing a new recipe, testing alternative cooking methods or implementing new/experimental kitchen equipment.)
2. Is the work based on a process of experimentation or does it rely on culinary science, food technology, engineering or computer systems? (Example: Experimenting with ingredient combinations, testing food safety processes or using software for inventory and ordering systems.)
3. Did you encounter technical uncertainty when designing a new dish, improving a cooking process or implementing operational technology? (Example: Not knowing if a new ingredient blend would achieve the desired flavor or if a new cooking method would meet quality standards.)
4. Does the work require a process of testing and refinement to resolve uncertainty? (Example: Conducting multiple trials to perfect a recipe or adjusting cooking times and temperatures to achieve consistency.)

What’s Your Restaurant’s Potential for Tax Savings?

Whether you’re unsure of the R&D tax credit potential for your restaurant or need help maximizing credits for your existing R&D efforts, our tax pros stand ready to help you make the most of the tax credit opportunities available to you.