It all started when you were in college and couldn’t stomach drinking the same bad beer night after night. All of your friends spent hours in front of a beer pong table guzzling swill that you just couldn’t handle. While your roommate chugged Bud Light and Natural Light you were reading John Palmer’s How to Brew and Charlie Papazian’s The Complete Joy of Home Brewing. One day you were going to make good beer.
After graduation, you were making some money so you invested in some equipment to make a few beers at home. You didn’t mind your day job (let’s just say you were an architect) but at the end of the day you couldn’t wait to get home. You made your Pumpkin Ale to serve your family at Thanksgiving and that specially spiced IPA for every 4th of July barbeque. Friends and family kept saying you should sell your beer but this was just for fun, right? Just something you loved to do in your spare bedroom.
Ten years later your spare bedroom had turned into a full-fledged micro-brewery with all the home brewing equipment. You have been saving and scrapping. You had the know-how. You had the savings from all those architect firm bonuses, and you had the support of your family and friends. You threw caution to the wind and took your savings (as well as some investments and loans from those family and friends) and got yourself a leased space in a warehouse district nearby and started to build your brewery.
Things are going great! You have the equipment and the tasting room is packed. You spending every extra minute you have creating the next beer. You reach a point that you can leave your job as an architect (which came in handy designing the tasting room) and you are now working full time at the brewery. This is when you realize you aren’t just making beer but you are running a business. You never got into this to write checks, make deposits, and reconcile bank accounts. You didn’t get into this to pay sales tax and prepare your taxes. It’s time to get some help. It’s time for Clark Accounting Services.
We are here to help you get all the “business” stuff done so you can keep doing what you do best. We love good beer and we love local beer, wherever you happen to call “local”. There is nothing better than walking into “your” brewery and grabbing a quick pint before filling your growler to take home. With that in mind, we wanted to share a few accounting tips and tax considerations to remember as you build your brewery.
Sales and Use Tax
You are selling your beer and you couldn’t be happier. Every weekend you are selling flights, pints, and growlers. Don’t forget to charge sales tax. Nearly every state imposes a sales tax on items such as beer. In Virginia, this tax may be as high as 6% (or higher depending on the outcome of the past elections). Make sure you file your sales tax returns timely and that means by the 20th of the month in Virginia. Failure to file results in penalties and interest that you don’t want to incur.
Keeping track of your inventory and production could be one of the most challenging parts of the accounting for a brewery. In general, all costs associated with manufacturing and getting your product to the consumer can be considered part of inventory. That means not only all the malt, grains, hops, and water but the electricity, rent, salaries, payroll taxes, etc., etc., etc. This can become a complicated task and, if you let it, can cause you much more agony than necessary. Talk to your accountant about the best way to track your inventory and keep in mind that if you are running a local craft brewery you may not have much inventory on-hand. Serving fresh beer is important to the beer likely goes out the door as soon as it is manufactured.
Domestic Production Activities Deduction
The Domestic Production Activities Deduction can provide a brewery with a deduction against gross income equal to nine (9) percent of qualified production activities or taxable income. Before you get too excited there are two things to keep in mind. (1) The brewery must pay W-2 wages and (2) the brewery must be profitable. As a manufacturer of a product (beer) you may qualify for the deduction but be careful because if you are a brewpub, you will have to separate out the sales of beer and related merchandise from food sales (food sales don’t qualify).
Research and Development
I know what you’re thinking. How does a brewery qualify for a research and development credit? Believe it or not much of brewing comes down to research and development. You know that device sitting in your brewery used to fill crowlers? That was developed by the good folks at Oskar Blues Brewery (with the help of Ball) as a single use growler. The costs associated with developing that new canning process qualified for a research and development credit. Some other potential innovations your brewery may perform that may qualify for the R&D credit are:
- Developing new or improved hopping techniques
- Developing new or improved brewing or bottling equipment
- Developing new or improved filtration methodologies
The calculation is complex and can require some time but could provide a credit up to 20% of the qualified research expenditures that exceed the calculated base amount. It may not sound like much but this could result in some significant tax savings if you qualify. It is at lease worth asking your tax advisor if you may qualify for this credit.
Running a brewery, like running any business, can involve some unexpected accounting practices. As has already been stated, you just want to make some great beer and sell it to some good people. Make sure to find a good accountant that can help you keep up with all your bookkeeping needs. If you have any questions please reach out to Clark Accounting Services at our website, wesclarkcpa.com, email at firstname.lastname@example.org, or phone at 703-798-9200.
We look forward to hearing from you.