Do you own a brewery and have a question that you think may be outside of your CPA’s scope of knowledge? Do yourself a favor and just ask! From research and development (R&D) to trademarking advice, your CPA can provide insights into some tricky financial scenarios and help your business improve cash flow while finding savings.
There are a variety of reasons inventory matters when computing beer costs, particularly for your financial reporting. If your inventory is incorrect, it can affect the accuracy of your costs. For example, if you count inventory once per month, your monthly purchases or products used may not be factored in, misrepresenting actual inventory levels and, therefore, cost of sales. At the end of the month, brewers must make an adjustment to the actual physical inventory, which will affect COGS in the income statement. An alternative would be to keep a perpetual inventory system that records the sale or purchase of inventory with immediate reporting of the amount of inventory in stock, and accurately reflect the level of goods on hand.
COGS consists of all costs required to produce your product, including ingredients (malt, barley and hops), freight-in and freight-out for self-distributors, packaging (including keg leasing), excise taxes, labor and supplies.
It’s important to understand which tax laws—federal, state and local—are favorable to your business, in addition to applicable IRS codes. Are you eligible for Section 179, a part of the IRS tax code that allows a business to deduct the full purchase price of financed equipment and off-the-shelf software? Also, have you considered de minimis safe harbor election? Businesses can apply a de minimis safe harbor to amounts paid to acquire equipment in some circumstances.
Other options include bonus depreciation, an additional depreciation allowance, which is currently 50 percent of the cost in addition to regular depreciation and can be taken regardless of income or loss. You can also carry major losses forward to future years to take advantage of deductions over a longer period of time. Your CPA should be able to assist you with understanding what makes the most sense for your business from a tax planning perspective.
Breweries, like any other business, are eligible for a variety of tax credits and incentives that could help put cash back in their pockets. Chief among these incentives is the federal research and development (R&D) tax credit, which breweries can apply to myriad activities, including developing new or improved wastewater management techniques, ingredient mixing methodologies and experimenting with product mixtures to create new aromas or flavors, among others.
In addition to the R&D credit, brewers may capitalize on the domestic production activities deduction (DPAD), allowing a deduction from net income based on qualified production activities, and the Federal Insurance Contributions Act (FICA) tip credit. The FICA tip credit allows brewery owners to get a credit for part of the taxes paid on their employees’ gratuity when it exceeds the federal and state minimum wage thresholds. The aim of this tip credit is to incentivize employers to report tipping as accurately as possible, resulting in more revenue from the tax credit once returns are filed. Additionally, on a local level, breweries can take advantage of manufacturing as well as sales and use tax incentives specific to the area in which they are producing craft beers.
Confirm with your CPA the credits (if any) for which you may qualify. Typically, beneficial credits exist for both small and large breweries, and every business should be able to apply some credit computation annually.
You have several options for structuring your business for maximum tax benefit. The first is the management company structure, in which owners set up a separate C or S corporation to manage payroll and similar management activities. This structure is ideal for companies operating LLCs with owners subject to self-employment tax.
Another option is a holding company structure, which is simpler and less expensive in terms of accounting and tax costs. This is ideal for having several single-member LLCs and offers deductions for startups and pre-opening expenses.
LLCs offer a degree of flexibility that may make them highly attractive to brewery owners. For example, they allow for an unlimited number of members (including non-U.S. residents and citizens), flexibility of distributions, an unlimited number of subsidiaries as well as less paperwork and ease in setting up. However, LLCs do entail some drawbacks, such as more restrictions surrounding transfers of units, the possibility of dissolution if a member leaves the LLC, and differing operating rules from state to state.
Your CPA can help you identify whether an LLC makes sense for your business and, perhaps more importantly, can help you establish an operating agreement and other formalities (that are not mandated by the LLC structure) to help protect your business.
You have a couple of different options available to you, both of which your CPA can discuss. First, you could purchase the building and perform a cost segregation study, which may allow you to shorten the depreciation time on the asset from the 39 years the IRS typically assigns to non-residential property. You could also pursue a fixed asset review, which allows you to identify where you have the opportunity to reclassify assets for swifter depreciation.
It can be difficult to make an apples-to-apples comparison between yourself and a competitor, as a number of different metrics can be used to measure success. Your CPA can help you split your revenue streams into separate profit centers to help you get a better picture of how your business is performing. You’ll need to understand what portion of your revenues are derived from first- and third-party distribution, retail and restaurant operations. As you’re assessing each unit’s performance, you should use consistent baseline metrics to ensure you can accurately compare results (e.g., you should measure the amount of revenue derived from beer sales across each profit line in the same units—per gallon, per barrel, etc.).
From there, you can begin to look at how your performance stacks up against the competition. This will allow you to understand how your retail sales, for instance, may compare to that of a microbrewery without brewpub operations, or your restaurant operations to a gastropub that doesn’t brew its own beer.
The most important point to keep in mind when filing excise tax returns are that each jurisdiction has different filing requirements. For example, some jurisdictions may require paper filings rather than digital, which could impact your overall timeline. In addition, some filing areas may be more burdensome and time consuming than others. For example, if you’re filing in Illinois, its RL-26-R requires that you report every resale customer and how much you sold, as well as that customer’s state and account number. Failing to collect all of this information from the start can cause delays in reporting and missed deadlines. An experienced CPA can help you get all of your ducks in a row well in advance, helping to ensure compliance and avoid penalties.
Yes! Doing so will make you distinguishable from other craft brewers, especially if you cover your brewery name, logo and core brands. While you will want to consult with a qualified legal expert to develop your trademark, your CPA can help you identify opportunities to write off expenses related to the trademark depending on the circumstances, making this a valuable conversation in which to include your CPA.
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By Dirk Ahlbeck. This article originally appeared in BDO USA, LLP’s “Selections” newsletter (Winter 2016). Copyright 2016 BDO USA, LL. All rights served. www.bdo.com.
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