Tax Opportunities on Tap for Breweries and Brewpubs
Craft brewers have evolved from specialty producers into major players in the food and beverage industry, producing 22.2 million barrels of beer in 2014. Growth in the craft brewery market has far eclipsed growth in the total beer market, increasing 18 percent in volume and 22 percent in retail dollar value last year, compared to a 0.5 percent increase the total beer market, according to reports from the Brewers Association
. These increases are markers of an overall seismic shift in beer appreciation in the U.S. toward a culture that favors innovation and personal local connections.
To effectively respond to shifts in consumer behavior within the industry, it’s important for brewers and brewpubs to be familiar with the unique tax landscape in which they operate in order to maximize profitability and minimize tax liabilities.
Here are a few of the tax opportunities offered by federal, state and local governments that can be advantageous to brewers and brewpubs:
Depreciation and Cost Segregation
Depreciation and cost segregation are reporting considerations that come into play when expensing assets and property “on the books,” as well as on tax returns. For a brewery or brewpub, depreciation involves expensing the initial investment in capital equipment and build out into three categories: 5-year property, 15-year property, and 39-year property. Bonus depreciation and Section 179 are important opportunities to consider because they allow businesses to accelerate depreciation by writing off expenses more quickly. Advantages to using one over another or a combination of both varies based on a variety of factors.
Another important opportunity for cost segregation is to conduct a professional engineering study, which is required by the IRS in order to realize the maximum depreciation benefits of a new or existing property. The study examines fixed assets, and can potentially help to translate 39- and 15-year property to 5-year property, which would allow the business to recover the costs of the property over five years, rather than 15 or 39.
FICA Tip Credit
The FICA tip credit is a credit against federal taxes, including social security and Medicare. This credit applies primarily to brewpubs, whose employees typically earn tips, as opposed to breweries. Businesses should note that the tax credit only applies to tips in excess of $5.15 per hour, as tips used to raise the employees wage to $5.15 an hour are considered to be satisfying minimum wage requirements, and thus are not eligible for the credit. The administration’s proposed fiscal year budget eliminates this tax credit, and restaurants and brewpubs could face challenges if this credit is removed.
Research and Development Credit
Initiated to incentivize technological advances and stimulate hiring of R&D workers, the Research and Development credit is especially relevant for breweries and brewpubs that, unlike restaurants, develop and manufacture a product. Breweries and brewpubs are best suited to take advantage of this deduction early in the life cycle of their businesses, as it is an incremental credit. Businesses should be sure to document all research in order to satisfy a four-part eligibility test. The tax credit applies to qualifying expenses such as wages, supplies and contractual services connected to product research and development.
Domestic Production Activities Deduction
The Domestic Production Activities Deduction applies to manufacturers, and is unique to brewers, who are manufacturers by nature. To qualify, a business must pay W-2 wages and must be profitable. The deduction amounts to approximately nine percent of sales related to production, meaning that brewpubs must separate sales of beer and related merchandise from food sales.
Structure and Capitalization
A brewery or brewpub’s lease can provide tax opportunity in the form of tenant improvement allowances or free rent, usually provided as incentive to lease property. Businesses can also take steps to form a holding structure to enable expensing of the opening costs of new locations. In addition, larger breweries and brewpubs should be aware that Section 263A uniform capitalization is a tax consideration that, as manufacturers, breweries must address when considering purchases and assets.
Breweries and brewpubs face many similar considerations, but it is important to note that brewpubs should maintain separate financial models, reporting and benchmarking for the food service and brewing portions of their businesses.
Is your business familiar with the unique tax break opportunities in the brewery and brewpub industries?