Improving Cash Flow with Tax Credits

Cash flow can be improved by claiming R&D tax credits. Tax laws in existence since the early 1980s are written by the U.S. Treasury Department and enforced by the Internal Revenue Service (IRS). As is the case with much of our tax law, the law that was written by the Treasury within the area of R&D tax credits, as it relates to the types of activities and resulting costs that qualify for the credit, are subject to interpretation.

Certain political directives have historically been more or less “taxpayer friendly,” which are based upon a particular administration’s agenda. When the IRS originally interpreted the law written by the Treasury, it was very restrictive as to what they allowed companies to claim for R&D credits. Once a precedent has been established, it usually requires the Treasury to write interpretative guidance, which explains what they originally intended. This happened in the case of R&D tax credits and, therefore, allowed the opportunity for companies to be confident in claiming the credit they are entitled to claim.

In 2001, regulatory intent was to get the IRS back on track, clarify the original intent of the law and dispel fears created by the IRS. The final regulations were a taxpayer victory with activity definition and documentation standards.

Under the old law, “Discovery of New Information,” discovery is synonymous with science or scientific matter (chemical, biological or physical). With the current law, “Appropriateness of Design,” design does not have to be synonymous with science or scientific matter. Application of known principles are used to solve problems which may simply involve choosing the most attractive product form, meeting ergonomic standards or complying with heat, noise or other environmental specifications. The word “new” refers to the taxpayer. Existence in the public domain is not relevant.

Regarding credit basics, the government subsidy is for routine, day-to-day, continuous innovation. The state R&D tax credit is available in many jurisdictions, and a company can look back three years. Federal refunds are not subject to taxes. There is also interest attached to refunds. The credit is a direct “dollar-for-dollar” reduction of the income tax liability owed as a result of the company reporting taxable income. The credit—which is a government subsidy in addition to the company deducting (reporting as an expense) the same costs (payroll, supplies, etc.) that the credit is based upon—is claimed on the business tax return for a C Corporation and the individual owners’ tax returns for a flow-through entity (S Corporation, LLC or Partnership). The credit components are qualifying activities, qualifying costs and whether the qualifying costs exceed a base period threshold.

Qualifying activities require thought and physical effort. An example would be a new or improved business component such as a product or formula, production process or computer software.

Using principles of science connected to engineering, physical, biological or computer science qualify. However, social sciences, works of literary art, advertising or management consulting do not. Patent history is presumptive proof of qualifying activities. The degree and length of time or effort are not relevant. The success of the effort, activity or project is not a requirement.

Qualifying costs include W-2 earnings, supplies and materials (both direct and indirect) and contract research (65% of fees to outside consultants).

Technological expertise including chemical engineering, industrial engineering, biological sciences and food technology qualify for the tax credit. Operational steps from concept through validation development with R&D and customers, tests and evaluating results, package design, manufacturing/ packaging processes and trial production runs are all qualifying activities and costs.

  

“Improving Cash Flow by Claiming R&D Tax Credits,” Terry Schwartz, RSM McGladrey Inc., Terry.Schwartz@rsmi.com

—Summary by Elizabeth Mannie, Contributing Editor

Churn Technology in Frozen Desserts

Who says you cannot teach an old dog new tricks? The dairy industry is still coming up with new technologies to enhance product quality. Among these are new churn technologies that have the potential to yield products with improved flavors and textural characteristics. One of these technologies is the Continuous Product Recirculation with Emulsification of overrun Air and Mix (CREAM) freezer concept. The attributes of this process are still being discovered.

Churning has been used to manufacture butter for ages. Old-fashioned churns were manufactured from wood and were hand-powered. The farmer or his wife would agitate the cream to produce butter. Controlled partial churning is needed for ice cream manufacture. (The operation of the CREAM freezer may be seen in the chart titled: “Principles of Operation.”) With this technology, operators may be able to produce products such as sorbet and dairy-based frozen desserts that have greater stability and enhanced mouthfeel. Ingredients are blended in a tank. The blended ingredients are pumped to a cylindrical freezer, where they are mixed. Prior to freezing, overrun from the freezing cylinder and overriding air are added to the mix. The partial recirculation of frozen product allows for lower draw temperatures and smaller ice crystals as well as smaller, more evenly distributed air cells in the end products. Hence, the finished product  texture, consistency and meltdown can be improved with proper selection of  ingredients (i.e., stabilizer, emulsifier and protein).The system allows the processor to manipulate pre-aerator speed, dasher speed and the percent of recirculation to allow customization of the operating parameters to each formula’s needs.

Sensory and meltdown data from products manufactured using the CREAM system show documented, relevant  differences. Finished products can show excellent sensory and performance properties. The company is still evaluating the “whys” of the process. For example, air cell and ice crystal data do not explain all differences in performance (i.e., meltdown, texture scores). Results to date indicate that it is obvious that formulation plays a role in system performance, so each formula will need to be evaluated individually. Among the parameters that are being studied in the future are emulsion destabilization, fat cell size and crystalline states.

  

“New Churn Technology in Frozen Desserts: Identifying Real Opportunities,” Main Street Ingredients, Phil Rakes, technical specialist, phil.r@msing.com    

—Summary by Richard F. Stier, Contributing Editor

Increase Productivity with New Product Development Software

Computers have made work much easier in many industries. The food industry is no different. Now available for product development scientists is a Windows-based program that provides developers with electronic help in formula management and nutrition facts panel development, as well as regulatory alerts, guidelines and restrictions. In addition, it aids with regulatory compliance, including ingredient declarations, and even Material Safety Data Sheets (MSDS) and workflow/project management. The ultimate goal is to streamline the development process, so companies can get their products to market more quickly and at lower costs. The key to the program, called New Product Development (NPD) Software, is that it allows different departments to access a common database to share ideas and work more efficiently.

The Resource (Ingredient) Query feature allows users to quickly locate components that meet defined criteria or those which may be used as substitutes. These different materials may then be compared to evaluate potential differences in functionality and performance. The program also allows developers to evaluate potential substitutions. One feature that will make managers happy is that it provides cost comparisons of different formulations. This can save time and money if a promising formulation “costs out” to be too high.

The program also has the ability to capture Certificates of Analysis, which are an essential component of product quality and safety programs. Once the database has been developed and all pertinent data inputted, the system may be queried to search for existing formulations that meet new or existing customers’ demands. The software has also been designed to provide an automatic alert if a formulation does not meet established criteria, such as a mandatory regulatory requirement. The program will also flag regulatory compliance issues that need to be addressed. Once the product has been finalized, the software has the ability to generate a “Nutrition Facts” statement that includes the new regulatory requirements for trans fatty acids and food allergens.

One other feature that helps enhance interdepartmental cooperation is the Development/Workflow Approval feature. This allows management to spread the workload and monitor how a project is progressing. It also helps ensure that the development process proceeds smoothly and in a stepwise progression; that is, developers do not “jump the gun” by moving forward before the appropriate approvals have been granted.

The use of NPD Software has the potential for streamlining the product development process and reducing costs. According to the software developer, the program can help food processors manage the development process electronically. The software can help plan the process, monitor progress (milestones), compare ingredients and formulations, alert developers to potential regulatory concerns and develop nutritional labels that are in compliance with the latest regulations (see chart “Nutritional Information”). The company believes its product can reduce the time from product conception to when it enters the market. This software also can enhance how a company responds to new or existing customer inquiries and enhance employee satisfaction; these efficiencies will help to reduce costs and economize operations.

  

“Using New Product Development Software to Accelerate New Product Development,”

Ted Pliakos, vice president—sales, Advanced Software Designs, tpliakos@asdsoftware.com

—Summary by Richard F. Stier, Contributing Editor

Food Quality and Safety Challenges

Food safety should be an integral part of the product development process. Developers should adopt a program of risk assessment, a process for determining the risk associated with biological, chemical or physical hazards, including allergens in foods. Microbiological risk assessment focuses on the likelihood of harm resulting from human exposure to a foodborne pathogen. Microbiological risk assessment helped the industry develop effective Hazard Analysis and Critical Control Points (HACCP) plans.

Food also can be contaminated with spoilage organisms and foodborne pathogens during processing, handling and storage. The developer and/or his food safety support team should understand the basic principles of microbial growth; what organisms may be present in the foods; the growth characteristics of these organisms; how to inhibit or destroy potential pathogens or those that cause economic spoilage; and how distribution and storage may affect the microbial growth in the product. The generally accepted microbiological risk assessment framework provides estimates on the probability of disease occurrence based on hazard identification, exposure assessment, dose-response assessment and risk characterization.

Food additives and ingredients added to foods during processing play an important role in the food product from an economical, nutritional or safety point of view. Inconsistent use of food additives and use of contaminated ingredients may result in unfavorable effects on the quality and safety of the food product.

Microorganisms have defined growth parameters. In stress conditions, they may be able to survive or grow slowly beyond these. As an example, Salmonella does not thrive in dry environments, but it has survived often enough to cause a number of outbreaks. Intrinsic parameters are an inherent part of plant and animal tissues, and extrinsic parameters are factors that can be controlled or changed. Both affect the growth of microorganisms. (See chart “Measuring Microbes.”) Part of the risk assessment process is to understand how these factors affect the organisms that will affect food products and use those parameters to kill, reduce or inhibit the target organisms. One of the tools employed by product developers for food stability, safety and quality is called “hurdle technology.” Hurdle technology uses a combination of parameters such as controlling temperature, pH and water activity, and the use of preservatives to create multiple obstacles to potential pathogens or spoilage organisms.

The final step in the process is to gather data to determine whether a specific formulation is microbiologically stable. Microbiological challenge testing is a useful tool for determining the stability of a food product formulation against spoilage organisms or foodborne pathogens. In these studies, in order to determine how changes in formulation or processing parameters affect the microbiological stability, spoilage organisms or foodborne pathogens are inoculated into or onto the product. These studies must be carefully designed, and clear objectives must be established at the start of study.

The end result of a well-designed validation study provides critical information on the microbiological stability and safety of a product. If a formulation or process changes, the validation study may have to be repeated.



“Food Quality and Safety Challenges for Product Development,” Erdogan Ceylan, director of research, Silliker Inc., erdogan.ceylan@silliker.com, www.silliker.com

—Summary by Richard F. Stier, Contributing Editor