As year-end approaches, certain tax planning strategies should be in motion for microbreweries and brewpubs. Proper planning could result in major tax savings for the business and owner. There are three tax saving provisions that apply to the beer manufacturing industry. My goal is to educate you on the “big picture,” while understanding the actual calculations should be performed by a tax professional. It is important to have a tax professional put your company in the best position to take advantage of these savings. The following provisions consist of two tax credits and one deduction:
- FICA Tip Credit
- Research and Development Credit
- Domestic Production Activity Deduction
FICA Tip Credit — For this credit to apply, you must have tipped employees. Brewpubs and Microbreweries with taprooms, listen up. The easiest way to explain this is reported tips are subject to the Federal Insurance Contributions Act (FICA). The business matches the FICA; some tipped employees make a lot of money. What the credit does is recapture some FICA paid for wages that exceed minimum wage. The calculation is quite complicated, so just understand if you have tipped employees on a regular basis, you probably qualify. Ask your CPA to explain and nudge your payroll provider to prepare that report.
Domestic Production Activity Deduction — Unlike a credit, this one has some limitations. This deduction says since you are manufacturing something on U.S. soil and are paying wages, we will give you an additional deduction. How much? Up to 9 percent of qualified production activities. Qualified production activities include wages for production workers (brewhouse staff) and Cost of Goods Sold to name a few. This deduction has a “use it or lose it” clause and is limited by net income. Once again, this deduction is a super complex calculation and should not be attempted at home.
Research and Development Credit — This credit applies to any research and development you perform on premise. Research and development in a brewery? Think test batches or recipe testing. To promote creativity, some breweries require brewers to develop “wacky” batches to see if they stick. The R&D credit must meet a four-part test to be valid:
- Permitted Purpose — New or help existing process;
- Elimination of Uncertainty — Purpose is to eliminate uncertainty;
- Process of Experimentation —Systematic process to evaluate one or more alternatives; and
- Technological in Nature — principles of physical, biological, engineering or computer science.
The biggest thing I can tell you with this credit is document everything that was involved in the research. Some examples of documentation are: Receipts for ingredients; process to produce; outcome; taste tester comments. Also, prepare a sheet that outlines the four steps and how they apply to the project. This is the most complex calculation of the three, so get some help.
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at firstname.lastname@example.org.