Today, the combination of innovative flavors and unique branding has led to the success of the craft beer industry. With an ever-growing demand for more and more unique varieties, it’s no mystery why breweries are popping up all over the nation. Whether breweries are established or just getting off the ground, it’s important for brewers to know what options there are in terms of brewery tax benefits.
Like any business, producing and retaining enough of your profit is critical to sustainability, and beer is no different. Here is a list of 5 brewery tax tips that will help you maximize your wealth and keep those taps flowing.
1. Research and development (R&D) tax credit
Do you think that research and development only happen at tech companies? Think again. Breweries are constantly innovating the brewing process, developing new or improved product formulas and testing out new procedures — all of which are qualifying R&D activities. The tax credit can be applied to expenses associated with any R&D activities, including wages, supplies and services used during the process.
In addition, small businesses may apply their R&D credit to offset payroll taxes. Like many start-ups, breweries often struggle to make and sustain a profit their first few years in business. While not profitable, the odds are they still have payroll to maintain. This legislation allows small businesses and breweries to put those R&D credits toward those payroll taxes rather than income taxes to realize an immediate cash benefit.
How to Qualify for the Brewery Tax Credit
The R&D qualification process is tricky and requires a four-part eligibility test. For this reason, it’s recommended that you have extremely organized and accurate documentation of the costs associated with your R&D activities. Qualifying activities include anything developed or improved, such as bottling processes, preservative chemicals, filtration methods, flavor or aroma profiles, or other advances in methodology or procedure. Our Research & Development Tax Credit Team is available to support you through this process, more information is available on our R&D service page.
2. Charitable donations
Charitable giving is an exceptional way to save some cash throughout the year. Contrary to popular belief, charitable giving can mean donating physical items rather than just straight cash. Like other businesses that have an inventory supply, breweries often have an excess of inventory or out of season beer throughout the year.
Example of the Brewery Tax Savings
Let’s say your brewery makes a delightful winter ale, but come springtime, consumers no longer crave those comforting notes of nutmeg and cinnamon. By donating this excess beer to a qualified charitable non-profit for a fundraising event, you could receive a brewery tax deduction. The beer must of course be in consumable condition and must be donated to a registered 501(c)(3) to qualify.
Note: Be sure to keep documentation of the donation as well as a signed form from the charity to receive the tax benefit.
3. FICA tip credit
For brewpubs, customer tips are a critical part of employee compensation. The FICA tip credit gives brewpubs the chance to claim a credit on their federal taxes, including social security and Medicare. Note that this credit is only applicable to tips that put the employee more than the national minimum wage ($7.25 per hour). Employers are responsible for 7.65% of FICA payroll taxes, making this credit a huge asset when properly utilized. A simple year-end payroll report will showcase all the necessary information to qualify for this credit.
4. Section 179 deduction and bonus depreciation
Section 179 of the IRS tax code gives businesses the opportunity to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. To encourage business growth and investing, this deduction is one of the few that really helps small businesses grow their operation.
While businesses used to write off a portion of the purchase each year as a part of depreciation, this deduction allows businesses to write off the entire purchase price for the year they buy it (up to $1,080,000 in 2022). This covers everything from software, corporate vehicles, and machinery.
Bonus depreciation is also a great way to quickly recover the cost of capital assets. Essentially, bonus depreciation allows breweries to purchase equipment and expense the asset immediately in return. Bonus depreciation allows for an immediate deduction of 100% of the cost of the assets, for assets placed in service by December 31, 2022.
5. Sales tax exemption on manufacturing equipment
Since brewing naturally requires a large amount of production equipment, most brewing equipment will qualify for manufacturing sales tax exemption. The exemption allows a 4.1875% sales tax rate reduction on qualified production purchases. Claiming the reduced rate is simple and well worth the benefit. When making a qualified purchase or lease, simply provide a Partial Exemption Certificate for Manufacturing Equipment to the seller. Although the exemption began in July of 2014, it’s not too late to get a refund for the sales tax exemption that could have applied to prior qualifying purchases. Consult with your tax advisor to see about getting a refund for any past overpaid sales tax.
Start taking advantage of brewery tax saving opportunities
Whether it’s a bold new flavor, a more economic bottling procedure, or a new facility to expand your operation capacity, be sure to take advantage of the many brewery tax incentives offered. If you want to learn more about how your brewery can start saving cash, contact our craft beer and wine specialists.
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