07 October 2015
American Cheese: A Family Business Cashes in on Research and Development
Two years after buying a small dairy farm in Willows, California, three brothers dug a deep cellar with their bare hands and the help of a horse and a fresno scraper.
Richard, Fred and John Rumiano, Italian immigrants, started experimenting with butter and cheese in 1921, and needed a storage facility that was both climate controlled and theftproof. They found themselves modernizing the cellars they remembered from the old country in Italy.
What the original Rumiano brothers couldn’t have foreseen was that investments in small technical changes to improve their cellar—like introducing adobe clay and thick concrete cellar walls as natural insulators—would one day be lucrative to their legacy.
The Rumianos have been engaging in research and development activities from day one. After completing a formal tax study in early 2015, they filed a claim with the IRS for all open tax years.
By the mid-1930s, the Rumiano brothers had built California’s largest cheese company. They were the first to introduce the Dry Monterey Jack variety—once dubbed the poor man’s parmesan—and had established nothing short of a cheese empire.
Despite their rampant early success, staying competitive proved difficult as the dairy industry quickly commercialized, and the Rumiano brothers’ enterprise eventually downsized from eight to two facilities.
Plenty of companies have been dealt similar fates; the last century has witnessed U.S. business owners in almost every industry enter a perpetual race against new technology. Formerly family-dominated industries like agriculture and dairy have changed drastically since Rumiano Brothers was founded, and while things aren’t as quaint as they once were for small business, they’re not as difficult anymore, either.
That’s thanks to the Research and Development Tax Credit, a government-sponsored benefit introduced in 1981 to incentivize U.S. companies to maintain greatness and foster a competitive, quality-driven market. The R&D Tax Credit helps offset the ever-increasing costs of improving business in a complex industry landscape. Congress believes there is still room for mom-and-pop businesses to coexist with their corporate counterparts, and this cash resource can help businesses of all sizes remain competitive in a global marketplace.
“I want the newest, greatest, and most efficient products and procedures for us. Having the money to put toward a new vacuum machine, and improved organic cleaning agents is the real benefit of the R&D Tax Credit.” – Joby Rumiano
Rumiano and R&D
Tax relief provided by the R&D credit has helped the present-day Rumiano clan invest in top-of-the-line machinery to help keep their operation competitive and relevant.
“Research and development is very important to any entity, and it’s a big part of what we do here at the plant on a daily basis; problem solving for solutions is a fun part of the job,” said fourth-generation cheese maker and owner, Joby Rumiano. “Creating new products requires a lot of research, which takes time and costs money.”
Over 90 years after that first cellar was dug, California’s oldest family-owned cheese company—now run by Joby, Baird, Tony, Ray, and Owen Rumiano—is still storing cheese below ground, and continues to employ some of its founders’ traditional techniques. And while the Rumianos are sticklers for tradition, making cheese looks a lot different than it did nearly a century ago.
Last year, Rumiano Cheese Company engaged in its first R&D tax study with alliantgroup to determine if they were eligible to receive tax credits for years as far back as 2011 (the R&D Tax Credit allows companies to amend federal returns as far as three years back, and some states allow four years). A team of experts from alliantgroup, including a food processing specialist, visited the manufacturing facilities to observe the operation and audit the company’s documented list of projects.
Once qualified projects are identified, three types of expenses are reviewed and substantiated: employee wages, supplies and a percentage of contracting costs. An eventual calculation of these three expenses determines the total amount awarded back to the company by the IRS.
So, it’s fair to say that the more employees participating in research and development, the better. Out of about 120 workers between the two facilities, it was determined that at least 21 employees directly contributed or supported research and development activities. Some of those employees included maintenance technicians, a purchasing manager, production specialists and a packaging manager.
Rumiano Brothers is now called Rumiano Cheese Company, and is led by Joby, Baird, Tony, Ray and Owen Rumiano, among other family members and valued employees. The company employs about 120 people.
Reinvesting With Rewards
When it comes to upgrading machinery, food processing equipment doesn’t come cheap, but according to Joby, as the saying goes, “You get what you pay for.”
The Rumianos have invested over the years in high-end equipment to expand its offerings to fourteen different varieties of cheese. And with the cash resources they’ve qualified for thanks to the R&D Tax Credit, there’s no better place to invest.
“As a company leader, I want the newest, greatest, and most efficient products and procedures for us. Having the money to put toward a new vacuum machine, and improved organic cleaning agents is the real benefit of the R&D Tax Credit,” said Joby.
This year, the company installed a sophisticated reverse osmosis/nanofiltration/water polishing system to create a higher concentrated product. The big-ticket technology removes impurities from liquid, producing refined water as a byproduct. The recycled water flows back into the plant, reducing the demand on city resources. More importantly, the purified water acts as one of the high-end ingredients that contribute to the signature Rumiano taste and smell profiles.
“The new technology that we are implementing is very expensive,” Joby said, “but, precision equals better results.”
Other plans for investment this year include adding new elements to its production line and adding a new R&D phase in the lactose building, all of which will aid the production of the 12 million lbs. of cheese that Rumiano’s makes every year.
“I’m sure you can tell that we’ve been able to spread this money around significantly!” said Joby.
How Did They Qualify?
The agriculture, dairy and food processing industries are usually ripe with qualifying research and development activities that can lead to qualified research expenses, which are refunded by the R&D Tax Credit (the credit also extends to businesses across countless technical and non-technical fields). Unfortunately, far too often companies don’t take advantage of this opportunity. The Rumianos may have qualified for cash refunds as far back as 34 years ago when the R&D credit was first introduced, but they only elected to pursue it last year.
The following projects were among the many qualifying activities on a long list that alliantgroup uncovered:
EXPERIMENTING WITH INGREDIENTS
“There is a lot of research and development that goes into finding the ingredients and making them work,” said Joby, noting that the difference between the natural and organic cheeses is “all in the ingredients.” In fact, the strict ingredient mix of organic cheese makes it a scarce resource.
With each trial batch of cheese, the company identifies new production specifications including a variety of mixing techniques and cooking temperatures. Using a number of food sciences, including chemistry, projects involving ingredients are technical in nature, which is one of the requirements to claim the R&D Tax Credit. These projects typically involve an extensive process of experimentation, another requirement to claim these tax benefits.
DIVERSIFYING WITH NEW PRODUCTS
Rumiano Cheese Company’s entire organic cheese line, organic butter and organic WPC-80% was the first in the world to achieve Non-GMO Project Verification.
The company built a state-of-the-art Whey Protein Concentrate Facility in 2011, a plant where they produce a homogeneous powder called WPC-80%. With the advanced reverse osmosis technology they are now using, Rumiano’s is also turning their concentrated byproduct into dried edible lactose. These products are sold globally in bulk and have helped Rumiano’s diversify its product lines.
According to Joby, “The new equipment is more energy efficient, smaller, quieter, more accurate and controllable. It is amazing to see how far the dairy industry has come with its manufacturing processes.”
Implementing new machinery to create new products, or improve the old ones, checks off another one of the R&D Tax Credit’s requirements, which is a new or improved business component. When they invested in innovative equipment and subsequently incorporated new processes, the Rumianos were setting the stage to offset that huge expense with a lucrative tax refund.
TAKING A CHANCE ON SUSTAINABILITY
control panel for the Wastewater Treatment Facility.
The Rumiano wastewater treatment plant biologically treats about 35,000 gallons per day of cheese production waste.
For a business so heavily influenced by its past, Rumiano’s has a remarkable, forward-thinking approach to sustainability that is unmatched by companies three times its size.
Ten years ago, the family built its own private, onsite wastewater treatment plant to reduce the strain it was passing onto the local municipality’s outdated facilities. These efforts allowed the town to expand its services to the growing area, and have helped generate $7,500,000 for the local economy of Crescent City, California, where Rumiano’s manufacturing plant is located.
Even a decade later, “We have people come to look at [the facility] to this day,” said Joby, adding, “[The facility] was the first of its kind utilized in a cheese manufacturing operation, and has worked incredibly well. It has allowed the city to grow.”
Operating a facility that biologically treats 35,000 gallons of cheese water was hardly in their wheelhouse, but over the years, the company has carefully evaluated how to optimize and improve the wastewater system. The Research and Development Tax Credit encourages companies to try new things and requires that projects are intended to eliminate uncertainty for out-of-the-box ideas, even if the experiment is a bust. The Rumianos took a big chance with this project, but proving they could pull it off and continually improve upon the process has paid off, and in more ways than one.
“It is nice to see the government and utility services offering incentives for becoming more sustainable. Overall sustainability creates cost savings,” said Joby. “The new equipment is more energy efficient, heat and water recovery systems are more common, and process controls are better.”
“Everyday Challenges Create Success”
The Rumianos have come a long way from digging cellars.
“My dad always says, ‘this used to be the worst job in town, now it’s one of the best’,” Joby revealed.
And now that he’s seen firsthand how easy and worthwhile an R&D tax study is, Joby Rumiano couldn’t agree more that things are looking good for their cheese business.
“Technology has helped with every aspect of our company, from computers to valves. It has helped with product consistency, efficiency, food safety and overall quality. The everyday challenges create ideas, which eventually lead to success.”
Tell us how your business is better off thanks to the Research and Development Tax Credit.
The R&D Tax Credit is an immediate source of cash, and can be a significant reduction to current and future years’ federal and state tax liabilities.
Any company that designs, develops or improves products, processes, techniques, formulas, inventions, or software may be eligible. In fact, if a company has simply invested time, money and resources toward the advancement and improvement of its products and processes, it may qualify.
For more information or if you think your business could collect benefits under the R&D Tax Credit, please click here to contact alliantgroup for a complimentary consultation and evaluation of your projects.