If your food or beverage company develops new products, reformulates existing ones, improves production processes, or engineers packaging solutions, you’re likely performing qualified research activities every day. Food science is grounded in chemistry, biology, and engineering — exactly the disciplines the IRS requires under the four-part test.
But the food and beverage industry has a unique trap that doesn’t apply to any other sector: the taste exclusion. Under IRC §41(d)(1), activities aimed at achieving a purely subjective measurement — like taste preference — don’t qualify. The line between “we formulated a sauce to hit a target viscosity and pH at 90-day shelf life” (qualifies) and “we tested flavors until consumers liked it best” (doesn’t qualify) is critical.
Understanding where that line falls is the difference between a defensible R&D credit and one that gets disallowed. Here’s how the four-part test applies to food and beverage, which activities qualify, and what to avoid.
Key Takeaways
- Food science relies on chemistry, biology, and engineering — meeting the “technological in nature” requirement naturally when formulation involves measurable targets like pH, viscosity, water activity, or shelf life
- The taste and aesthetic exclusion disqualifies research aimed solely at subjective consumer preference — but doesn’t disqualify formulation work driven by measurable performance criteria
- Production process improvements — line speed optimization, yield improvement, waste reduction, automation engineering — often generate larger QREs than product development because they involve higher-paid engineering staff
- Supplies consumed during development — ingredients, packaging prototypes, lab materials — are QREs that food and beverage companies routinely overlook
Which Food and Beverage Activities Qualify?
The qualifying activities under IRC §41 are broader than most food and beverage companies expect. Here are the categories we see most frequently in R&D studies for this industry:
The Taste Exclusion: The Trap Unique to Food and Beverage
Under IRC §41(d)(1), qualified research must relate to function, performance, reliability, or quality — not style, taste, cosmetic, or seasonal design factors. This exclusion applies more directly to food and beverage than to any other industry.
Here’s how the line works in practice:
Qualifies ✓
Measurable technical targets
Formulating a sauce to achieve a target viscosity of 3,500 cP, a pH below 4.2, and a 120-day shelf life using only natural preservatives. The objectives are measurable, the uncertainty is technical (can these specs be met simultaneously?), and the experimentation is systematic (testing 15+ formulations).
Doesn’t Qualify ✕
Subjective taste preference
Holding consumer taste panels to determine which of five flavor variations “tastes best.” The objective is purely subjective (consumer preference), there’s no technical uncertainty (all five flavors work), and the “experimentation” is market research, not food science.
Qualifies ✓
Functional performance
Developing a plant-based protein bar that must achieve specific tensile strength (so it doesn’t crumble), water activity below 0.65 (for shelf stability), and 20g protein per serving without using whey. Each parameter is measurable and the formulation involves systematic testing.
Doesn’t Qualify ✕
Aesthetic and packaging design
Choosing between label designs, selecting packaging colors, or developing marketing-driven product names. These are aesthetic decisions excluded under §41(d)(3)(B) — even if they involve creative effort.
The critical nuance most companies miss: Taste panels don’t automatically disqualify an activity. If a taste panel is used to evaluate whether a reformulation achieved a functional objective — “does this reduced-sodium version maintain acceptable flavor at 30% less sodium while meeting our target water activity?” — the underlying formulation work can still qualify. The taste panel is just one evaluation method. What matters is whether the research objective is technical (function, performance, shelf life, nutritional target) or purely subjective (which flavor do consumers prefer). Document your objectives carefully, because this is exactly where the IRS focuses during examination.
The Scale-Up Problem: Where the Biggest Credits Hide
Here’s something most food and beverage companies don’t realize: the transition from bench-top formulation to production-scale manufacturing is often the most credit-rich phase of product development. A recipe that works perfectly in a 5-gallon mixer doesn’t automatically work in a 500-gallon production batch. The scale-up process involves genuine engineering uncertainty:
Heat Transfer at Scale
Cooking and cooling dynamics change with batch volume. Temperature uniformity, hold times, and hot/cold spots all behave differently at production scale. Testing and adjusting these parameters is process engineering.
Mixing and Emulsification
Shear rates, mixing times, and ingredient addition sequences that work at bench scale often fail at production volume. Reformulating mixing parameters to achieve the same texture and homogeneity is systematic experimentation.
Line Integration
Getting a new product to run on existing production equipment — adjusting fill speeds, depositing temperatures, packaging machine settings, and conveyor timing — involves iterative testing and engineering problem-solving.
From our practice: The scale-up phase routinely generates more QREs than the initial formulation phase because it involves higher-paid production engineers, more expensive ingredient runs, and weeks of trial production. We’ve worked with food companies that initially estimated $50,000 in R&D credits based on lab work alone — and ended up with $200,000+ once we included the scale-up engineering, production trials, and process optimization activities that no one had thought to document as R&D.
Qualified Research Expenses for Food and Beverage
Food and beverage companies have significant expenses in all three QRE categories — and the supply expense category is often larger here than in any other industry.
Wages
Food scientists, R&D chefs, quality assurance engineers, production engineers, packaging engineers, process technicians, plant managers directly involved in qualifying activities, and lab technicians.
Supplies
Ingredients consumed during development and testing (not production). Packaging materials for prototypes and trial runs. Lab supplies, reagents, and testing materials. Raw materials used in pilot batches that don’t enter commercial distribution.
Contract Research
65% of payments to outside laboratories (shelf-life testing, microbiological analysis, nutritional analysis), co-packers performing trial runs, food science consultants, and third-party packaging engineers.
What Doesn’t Qualify
Activities that don’t qualify:
| ✕ | Consumer taste testing for preference — panels aimed purely at determining which product “tastes best” without measurable functional targets |
| ✕ | Aesthetic packaging design — label art, color selection, brand-driven packaging decisions without functional engineering |
| ✕ | Routine production — manufacturing to established recipes and processes after development is complete |
| ✕ | Routine quality control — testing finished products against established specifications (but developing new QC methods can qualify) |
| ✕ | Market research and consumer surveys — studying consumer preferences, market trends, or competitive product positioning |
Industry Trends Driving New R&D Opportunities
Several macro trends are creating qualifying R&D activities that didn’t exist five years ago. If your company is responding to any of these, there’s likely unclaimed credit potential:
Clean label reformulation
Removing artificial preservatives, colors, and ingredients while maintaining shelf life and product performance. This involves genuine food science — finding natural alternatives that achieve the same functional results as synthetic ingredients.
Plant-based product development
Developing plant-based alternatives that replicate texture, binding, mouthfeel, or cooking behavior of animal-based products. Every plant-based protein bar, dairy alternative, or meat substitute involves significant technical uncertainty.
Sustainable packaging
Engineering compostable, recyclable, or reduced-material packaging that still meets barrier, shelf-life, and regulatory requirements. Moving from petroleum-based to plant-based packaging materials involves testing and iteration.
Supply chain ingredient substitution
Reformulating products to replace ingredients affected by supply chain disruptions, cost increases, or sourcing instability — while maintaining target specifications. Post-pandemic, this has become a continuous qualifying activity for many companies.
The documentation key for food and beverage: Keep lab notebooks, batch records, formulation logs, and trial run data. Document the technical objective for each development project in measurable terms — not “make it taste better” but “achieve target viscosity of X at Y pH with Z-day shelf life using approved ingredient set.” This framing is what separates a defensible credit from one the IRS will challenge under the taste exclusion.
Developing Products? You’re Probably Qualifying.
We’ll walk through your formulation, process engineering, and packaging development activities and give you a straight answer on credit eligibility. The initial evaluation is free — and we know exactly where the taste exclusion line falls.
Frequently Asked Questions
Does recipe development qualify for the R&D credit?
It depends on the objective. Recipe development driven by measurable technical targets — shelf life, nutritional content, water activity, viscosity, emulsion stability — qualifies. Recipe development aimed solely at consumer taste preference does not. The same formulation project can contain both qualifying and non-qualifying activities; the key is documenting which activities target measurable performance criteria.
We’re a small bakery — can we still qualify?
Potentially. Size doesn’t determine eligibility — the nature of activities does. A bakery developing a gluten-free bread formulation that must achieve specific crumb structure, moisture retention, and shelf life targets is performing qualifying research. A bakery simply following established recipes is not. Companies with under $5M in gross receipts may also qualify for the payroll tax offset — up to $500,000 per year even with no income tax liability.
Do brewery and distillery activities qualify?
Yes — fermentation science is solidly grounded in microbiology and chemistry. Developing new beer styles with specific IBU targets, experimenting with yeast strains for flavor profiles, optimizing fermentation temperatures and times, developing barrel-aging processes, and engineering production scale-up all involve genuine technical uncertainty and experimentation. The same taste exclusion applies, so document the technical parameters you’re targeting, not just the subjective flavor.
Can we claim the credit on ingredients used during development?
Yes. Ingredients consumed during the development and testing process — pilot batches, trial runs, prototype formulations — qualify as supply expenses. Ingredients used in commercial production do not. The distinction is whether the materials were consumed as part of the experimentation process or as part of routine manufacturing.
How much is the credit typically worth for a food company?
It varies based on the volume of qualifying activities and expenses. A mid-size food manufacturer with $3M in qualifying R&D spending (wages, supplies, contract research) might generate $180,000-$250,000 in annual federal credits, plus applicable state credits. Companies with active new product development pipelines and process engineering programs tend to generate larger credits than companies focused primarily on production. Read our complete R&D tax credit guide for calculation methodology.
What Should You Do Next?
If your food or beverage company develops new products, reformulates existing ones, improves production processes, or engineers packaging — and you’ve never claimed the R&D credit — you should at least know what you’re leaving on the table.
Schedule a free consultation and we’ll walk through your development activities, navigate the taste exclusion, and give you a realistic estimate of the credit value. We work with food and beverage companies of all sizes — from artisan producers to large-scale manufacturers — across California and nationwide.
Learn more about the IRS four-part test →
Manufacturers: see our production-focused R&D guide →
CPAs serving food clients: partner with us →
Martin Gamez
Founder, Tax Formulations
Martin is a tax credit specialist with over 25 years of experience in federal and state R&D tax credits, cost segregation, and business tax incentives. His background includes tenure at Big Four and Top 10 accounting firms, with clients spanning food and beverage, manufacturing, technology, aerospace, engineering, and life sciences. Read full bio →