Editor’s note: We originally posted this story last year, but our resident CPA guru Chris Farmand received so much great feedback that we’ve updated it for next tax season. Check it out below.
As year end approaches, certain tax planning strategies should be in-motion for craft breweries. Proper planning could result in major tax savings for the business and owner. There are four tax saving provisions that apply to the beer manufacturing industry. My goal is to make you aware of these benefits, while understanding the actual calculations are complex and should performed by a CPA. It is important that your CPA understand these strategies so he or she can best advise on how to maximize them. The following provisions consist of three tax credits and one tax deduction:
- FICA tip credit
- Domestic production activity deduction
- Research and development credit
- State credit and incentives
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 FICA. You as the employer must match this FICA amount. 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 throughout the year, you probably qualify.
Domestic production activity deduction
Unlike a credit, this one has some limitations. This deduction says since you are manufacturing something on US 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 Good Sold to name a few. This deduction has a “use it or lose it” clause and is limited by net income. This one takes careful planning to maximize and depending on your size can return some serious dollars to the owners.
Research and development credit
This credit applies to any research and development you perform on premise. Research and development in a brewery? R&D can happen in most industries as long as you are trying to improve an existing process. Think test batches or designing new method to handle waste water. The R&D credit must meet a four part test to be valid:
1. Permitted Purpose – new or help existing process
2. Elimination of Uncertainty – purpose is to eliminate uncertainty
3. Process of Experimentation – systematic process to evaluate one or more alternatives
4. Technological in Nature – principles of physical, biological, engineering, or computer science.
State credits and incentives
Most states have a list of business tax credits and incentives. The goal of these are to attract new business or expand existing business within the state. Some examples are: Economic empowerment zones, hiring a veteran, manufacturing & technology focused businesses, to name a few. Most businesses fail to act on them simply because it takes effort to see what programs are available and apply to them. A listing of recent incentives can be researched at your specific states department of revenue website.
My advice on maximizing these opportunities is to not be complacent and ask the right questions. Most CPA’s should be familiar with calculating or researching these credits. Be proactive about these benefits. Investors love to see these credit help them too, they increase the credibility of their investment. Empower an assistant to take 30 minutes a month to research or make a call to see what is available. I can tell you from personal experience these provisions have translated to significant tax saving among fellow brewers.
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 four 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 email@example.com.