How To Analyze Your Cash Flow

Too many brewers live on the edge when it comes to cash flow management. A majority of brewery owners manage cash in their head or on a piece of paper that projects only the next couple of days. Others only do it when it comes time to pay bills, process payroll, or when cash is low. These approaches can be dangerous and don’t provide enough information nor time to act. In this article, I walk you through a process to manage cash in Excel that is simple to use and manage. A link to an illustration is at the end of this model.  

STEP 1 – Determine a period to forecast cash flow

Usually, I recommend projecting out three months at a time and for each month, breakout inflows and outflows between those that occur in the first half and those that occur in the last half of the month. Some do this just monthly or on a weekly basis. There is no right or wrong method and it comes down to personal preference and time you wish to spend updating and analyzing this schedule.   

STEP 2 – Estimate cash receipts 

For those who wholesale beer, start by looking at your accounts receivable aging report. Look at your receivables and use the best information you have available about your customers, anticipate when you think you may receive payment and add that into the proper month in your schedule. Also consider credit terms and payment terms you offer and how that would impact the timing of cash receipts. 

Taprooms can be tricky. Unlike wholesale revenue where we know what is owed to us, we don’t really know what our taproom will produce. In trying to estimate taproom sales use these helpful hints: 

·       Consider using the prior three months average cash receipts and adjust for special events you may be having. Also consider seasonality trends or the results of the same time period in the prior year as a base line.

·       For new taprooms, do a little market research. Reach out to other brewers, the Guild, visit similar size locations and observe the volume. Also give your self a little bump for that “newness” factor.

·       Don’t use an estimated sales number here. Use deposits (for example, the amount from a Square deposit report) because deposits are net transaction fees and include amounts collected for sales and meals taxes or tips, which offset other disbursements like tips paid out in payroll or remitting taxes to the DOR for sales and meals tax. Using a deposit number ensures this is captured and don’t over or under budget cash flow.

·       Consider special events that you plan on having as well. 

STEP 3 – Estimate cash disbursements

Here comes the part that requires the most time and energy: mapping out your future disbursements. To help in determining disbursements, a good place to start is looking at the last three months of bank statements and reviewing your profit and loss. Summarize recurring transactions with vendors, take note of those that could be reduced or eliminated, and organize them into some basic categories. Categories that I have found to be beneficial are: 

·       Automatic fixed monthly payments – things like equipment lease payments, subscriptions, or other payments that get automatically pulled from your account and have fixed amounts.

·       Recurring expense payments – amounts that are recurring but tend to change month to month or are not automatic payments such as rent, payroll, benefits, excise taxes, utilities.

·       Inventory – hops suppliers, grain suppliers, cans, chemicals, etc.

·       Loan payments – monthly loan payments like SBA loans or investor notes.

·       Equipment purchases – planned capital expenditures such as new tanks, cost to setup a new tank, and additional inventory needed for such a tank.

·       Other variable expenses – other miscellaneous costs can go here. Often, I notice that most like to put a category here for those one-time unplanned costs to have some “catch all” bucket. If you notice you are consistently over in this category, double check to see if you need to categorize something differently or if you are spending on things you necessarily don’t need. 

This is not all inclusive and not, by any means, a one size fits all. I encourage you to tweak the model in a way that works best with your brewery. We break out costs between automatic and recurring so you can try to control the payments during the period with stronger cash flows to prevent risk of over drafting your account. 

Let’s talk about credit cards and how to factor them in. While charging expenses necessarily doesn’t decrease cash at the time of the expense, we are incurring a cost that does need to be paid in a short period of time. The only difference is you can partially pay your statement and run up a balance. We want to include these charges because we want to see how they impact cash – do we have the cash to pay now or later? Do we have the cash to prevent a large balance and prevent credit issues? Running up a balance on credit cards that can’t be paid off in a short period of time is a good leading indicator of cash flow problems. 

STEP 4 – Determine our change in cash 

Now we need to determine how we did by taking our projected (and actual) cash receipts and subtracting cash disbursements. The difference is known as our net increase or decrease to cash. Hopefully our receipts exceed our disbursements and we are positive for the periods. If we are, we should be generating enough cash to cover costs and generate a profit.   

If we have negative months, then we need to investigate. It’s not uncommon to have a bad month here or there but consistent negative months is not okay. Really dig into the results and investigate to see if there are any trends or issues you can get ahead of before it’s too late. 

Final Thoughts

I would encourage you to try this for a couple of months and really analyze your cash flow. Look at where you are over or under budgeting and drill into what is happening. Try to incorporate this into your operations by aligning cash inflows with special events and outflows needed in advance to prepare for those events. Creating such a link can help project future cash shortages and give you the time needed to prepare. It can also help show a future surplus which you can then match to a large purchase and reduce the need for short term loans or take that bonus you deserve! 

Please don’t hesitate to reach out with questions or for help when trying to implement such a process!

HERE’S AN ILLUSTRATIVE EXAMPLE

Cheers,
Bob Babine
rdb@edelsteincpa.com

Beer Excise, Sales, and Meals Tax 101

An overview of beer excise, sales, and meals tax in the state of MA for brewers and their breweries. 

For anyone who has tried to wrap their heads around the taxation of beer in MA, it can be a challenge. A Google search will bring you to various blogs that contradict each other, state websites that are difficult or impossible to navigate, and tax forms that are vague and make no sense. After helping a few of you navigate the nuances of tax compliance on beer, I would like to share with the MA Brewers Guild and you, some of the basics when it comes to beer excise, sales, and meals taxes. 

While each of these topics are worthy of their own blog post, this summary should provide enough guidance to help you get up and running and stay compliant on some of the most fundamental transactions that breweries encounter. For more complex matters, don’t hesitate to contact me. With that said, let’s start mashingout these nuances into something clear to understand!  

Part 1: Beer Excise Tax
First, we are going to start with beer excise tax and the required MA Form AB-1. Every brewery, wholesaler, and importer of beer in MA is liable for and to pay, an excise tax for the privilege of manufacturing or importing beer into the state for sale. With that said, when you manufacture your beer or import your beer (as a wholesaler), that beer becomes subject to the excise tax of $3.30 per BBL (31 gallons) in MA. MA excise tax is reported to the state on Form AB-1 which is due on or before the 20thday of the month following the month of production. Simple right? But when is my beer considered taxable beer and does it follow TTB requirements? What if I use a contract brewery? What about beer shipped out of state? Here are some compliance tips when it comes to beer excise tax and filing form AB-1:

When is my beer taxable in MA? Can I follow the TTB? 
Unofficially, sure, you can follow TTB rules to determine when your beer becomes taxable in MA as for most, the conversion cycle between production and sale is pretty quick. Officially, unlike the TTB with a designated tax-free zone, when your beer is packaged (bottled, canned, kegged, etc.) it becomes taxable in MA. Notice I said “packaged” and not pushed into a bright tank. Usually we recommend brewers take the position that beer manufacturing is complete when packaged.  This is because when you go from a bright tank to packaging you can have some loss in total BBLs or bad packaging runs that make beer unsellable and therefore non-taxable. If you are going from the tank to tap, make sure you have a clearly marked tax determined tank and log the beer added as that becomes your taxable beer. 

To report tax determined beer, your will utilize Schedule A: Malt Beverages Imported, Purchased or Otherwise Acquired- Form AB-1. But wait, why use this form if it doesn’t say “Manufactured”? That is because the government is behind and has not updated the form! So, what do you do? Here are some best practices, for manufacturers of beer (breweries):

• Date Received should be the date packaged;
• invoice number can be an internal batch number or production run number; 
• from whom imported or otherwise acquired can be either “manufactured internally” or the name of the beer packaged; 
• number of barrels or cases is total barrels produced;
• and fill in Box A under no tax paid the total gallons of beer produced. This amount will then be reported on page 1, line 1 Malt Beverages. 

The total gallons is then multiplied by $3.30 to determine your excise tax liability. 

What if I contract the production of my beer to another brewery?
When another brewery manufactures your beer and you purchase that beer from them for resale, you are a wholesaler. As mentioned above, MA requires wholesalers to file Form AB-1. You will still utilize Schedule A, however; you now have an actual invoice number, date received, and name of who produced the beer to fill in. But, the biggest difference is, when reporting gallons upon which tax was paid. 

When you acquire the beer from a manufacturer who is physically located in MA, the manufacturer is responsible for reporting and paying the excise tax beer. Therefore, the total gallons you acquired gets listed under box B of schedule A, Gallons upon which Mass. Tax paid. Here you are simply reporting to the state beer acquired and will have no excise tax liability. If you have made the mistake of paying the excise tax, not a problem. You can simply amend your Form AB-1’s to recover the tax. 

If you are utilizing out of state breweries and then shipping the beer into MA, you as the wholesaler, will be responsible for the payment of excise tax on beer brought into the state. In addition, you will also need to fill out and file Form AB-10, Report of Alcoholic Beverages Shipped into Massachusetts.

Lastly, the above discusses the rules when you are “Contract Brewing”. This is a relationship in which you pay a brewer, the “contract brewer”, to produce your beer. There is another relationship, though used infrequently, called Alternating Proprietorships. Under this arrangement, you and another brewer may take turns in using the physical premise of a licensed brewery, the host brewer, to brew your beer. In this type of relationship, the host brewer is not responsible for paying the excise tax and you will need to file your own form AB-1 and pay the required tax. 

Is beer shipped out of state subject to MA excise taxes? 
No. Beer shipped out of state is exempt from MA excise tax. You report sales out of state on Schedule F, Deductions. Also reported on Schedule F is beer disposed of at the brewery or loss on inventory due to breakage. 

Is beer sold for onsite consumption exempt from MA excise taxes?
Sales of beer for onsite consumption is considered a “meal” and as therefore separately taxed. You are responsible for paying the excise tax on beer produced and for collecting and remitting to the state sales tax on beer sold in your tap room. Still don’t believe me, check out MA DOR Letter Ruling 96-2: Sales of Malt Beverages by Restaurant Brewery (don’t let the word restaurant fool you as it applies to taverns, bars, and taprooms). Here is the link to the letter ruling:

http://archives.lib.state.ma.us/bitstream/handle/2452/54090/ocm09310387-1996-2.pdf?sequence=1  

Part 2: Sales and Meals Tax
Next, we will chat about sales and meals tax. Breweries report sales tax on Form ST-9 and meals tax on Form ST-MAB-4 (note meals, as stated earlier, includes sale of alcoholic beverages).  These forms are both due monthly, on or before the 20thday following the month you are reporting for.  Some common questions we see are as follows:

What are the tax rates for sales and meals tax? 
In MA, transactions subject to sales tax are assessed at a rate of 6.25%. Meals are also assessed at 6.25% but watch out! Some jurisdictions in MA elected to assess a local tax on meals of .75% bringing the meals tax rate to 7%. Be sure to check if your location is subject to the local tax. 

What transactions are subject to sales tax?
Let’s look at this transaction from two points of views. 

The first point of view is that of the consumer who purchases swag from your brewery. Generally articles of clothing are exempt from sales tax. Glassware and other swag items like stickers or bottle openers are subject to sales tax. Also, sales of prepackaged beer for offsite consumption are exempt. For transactions that are subject to sales tax, the brewery is to collect from the buyer the 6.25% on the sales price of items subject to sales tax and remit that money to the MA DOR. 

Growlers are tricky. Prefilled growlers that are already sealed, and in a cooler that a consumer can take from are exempt. When a consumer comes in with an empty growler and you fill it, that transaction is subject to sales tax. 

From the point of view of the brewery, items purchased for resale are exempt from sales tax because you are buying them as a reseller. But be careful, if you take stickers or glassware for example, to give away at an event, you are subject to self-charging yourself sales tax. The biggest thing I want to draw attention to for the brewery is this; purchase of equipment, materials, or supplies used to manufacture your beer or directly used in the conversion process to convert raw materials into a finished sellable product are exempt from sales tax. Most vendors a brewery deals with are pretty good about exempting certain items purchased, but some smaller vendors may not and you specifically need to ask for the exemption or provide them with a completed form ST-12, Exempt Use Certificate. This means you are certifying to the vendor that the purchase is exempt from sales tax. 

Just recently, the U.S. Supreme Court decided on the Wayfair Online Sales Tax Case. This can create a requirement to collect sales tax on sales of swag from your website shipped out of state. To see if this will impact you and your online sales, reach out to your tax advisor. 

What transactions are subject to meals tax?
Sale of beer, food, and snacks for onsite consumption are subject to meals tax. Now one thing I notice is a lot of breweries that sell beer in their taproom include sales tax in the price of the beer. Meaning they do not show the tax as a separate line item on your receipt. That is perfectly fine but keep in mind these two things: first, this is only allowed if the sole transaction on the receipt is sale of beer. If the receipt includes sale of beer, merchandise, or snacks, sales tax needs to be separately shown. Second, make sure you assess your selling price to determine if it is including or not including taxes. For example, if you sell a beer for $9 and assuming a 6.25% tax rate, are you just using $9 and therefore your revenue per sale is actually $8.44 or does the $9 not include sales tax so the end sale to the consumer is $9.56 and your revenue per sale is $9. I know this seems silly but if not accounted for correctly you could be leaving money on the table as you are supposed to be collecting from the consumer and remitting back to the state. Further from an analysis stand point, you can be overstating revenues. While the push back is there is an offsetting expense so my bottom line is not impacted, in the beer world it’s all about revenue per BBL or case equivalent and the tax included in revenue is not your revenue, it is the state’s revenue. For some with high tap room volume, this can be a material number.

Part 3: Bottle Deposits
Now the last item to talk about are bottle deposits. This is the most annoying thing out there for a nickel, but it is for a good cause, I guess….While this may not be a large number for most, it is still required in MA and you need to be compliant on all fronts to be in good standing with the state. 

When it comes to bottle deposits here is what you need to know. First, bottles and cans sold to a wholesaler do not need to be assessed for bottle deposits. Cans transferred from the brewery to the taproom or retail area for offsite consumption are assessed a nickel. Second, to report the receipt of deposits or refunds of deposits, you use MA Form AD-1,Abandoned Deposit Amounts Return. This form is due no later than ten days after the last day of each month. Third and last, do you need a separate bank account for this? Yes and I know it’s a pain…MA requires every bottler and distributor to establish and maintain a bank account known as a Deposit Transaction Fund and form AD-1 is your reconciliation of that account which is provided to the state. 

Wrap-up         
I hope you have found this post helpful and insightful as to what type of common transactions in the brewery will subject you to sales, meals, and beer excise tax. I encourage you all to take a moment and review internally your PoS systems and form AB-1s and reach out to your advisor if you think something feels or does not look right. 

If you want to chat through anything or discuss any of the items above in more details please don’t hesitate to reach out! 

Cheers,
Bob Babine
Edelstein & Company
Rbabine@edelsteincpa.com      

How Tax Reform Impacts Your Brewery

While watching congress has become a comedy show and people’s feelings on tax reform is all over the place, let’s take a look at some items that may be relevant to your brewery, once the president signs the Tax Cuts and Jobs Act into law. Note: this blog post only highlights some of the changes. Please consult your tax advisor and schedule a time to discuss planning and other changes, as well to maximizes your benefits under the new tax law.

1.     Most important, the new tax law included the Craft Beverage Modernization and Tax Reform Act (CBMTRA) which the National Brewers Association has been working on for almost ten years! This reduces your federal excise tax on beer from $7 per barrel, to $3.50 per barrel, on the first 60,000 barrels produced by domestic brewers who produce less than two million barrels annually. It also allows for you to be more creative and collaborate with your peers by the removal of tax between bonded facilities. These changes will be effective January 1, 2018, so remember not to over pay when doing your BROP.

2.     For small brewers with less complex operations, who operate tap rooms and turn inventory fast, or brewers who are just getting started, the new law makes your business tax return easier. If your gross receipts are $25 million or less during the preceding three years, you could be exempt from the complex inventory and accrual rules that were once required by the IRS. Not only could this help accelerate deductions, it can reduce your year-end tax preparation bill as there is less work to be done by your CPA.

3.     The new tax law also expands the small business exception for UNICAP by increasing the gross receipts test from $10 million to $25 million and removes the interest charge for the aging period of your beer. Again, this benefit is another way to help reduce the complexity of your tax return and potentially accelerate deductions for indirect inventory costs that were once required to be capitalized as part of inventory. Brewers who have an extensive barrel aging program or age beer for more than a year will most certainly benefit from this.

4.     Accelerated deduction under section 179 has been increased. Under old law, your accelerated deduction was limited to $500,000, reduced by the cost of eligible property placed in service that exceeded $2 million. The new law raises, subject to inflation adjustments, the limit from $500,000 to $1,000,000 and the start of phase down amounts is raised from $2 million to $2.5 million.

5.     Bonus depreciation, another good benefit that got an overhaul also. Instead of taking 50% of the cost on eligible property, bonus depreciation has increased to 100% for property placed in service after Sept 27. 2017 and before Jan 1, 2023. NOTE – consult your tax advisor on the best strategies to utilize 179 and bonus. Sometimes, it may not make sense to go gung-ho on these if you anticipate profit growth in future years with a slowdown in your CAPEX spending.

6.     Your business NOLS got a makeover! NOL Deductions are now limited to 80% of taxable income and you can no longer carry them back, but you can carry them forward indefinitely. 

7.     There is a 20% deduction for qualified business income for noncorporate taxpayers (LLC’s taxed as a partnership for example), subject to limitations. Consult your tax advisor now for planning opportunities as there are some significant complexities surrounding this substantial new deduction.

8.     While not a win, the new tax law repeals the domestic production activity credit that many breweries take. This credit allowed certain breweries to take a deduction equal to 9% of the lessor of your qualified production activities income or taxable income for the tax year. BOO!

Again, not an extensive listing of all the changes that were signed into law under tax reform, but the above can have a significant impact on your operations. Please contact your tax advisor to start planning on how to maximize these benefits.

Cheers,
Robert Babine, CPA
Edelstein & Company

Sending your craft beer abroad? Here is a tax benefit Uncle Sam wants you to use

By: Robert Babine
Edelstein CPAs

Thinking of selling your brew abroad? Did you know there are some tax benefits available for exporters?

Uncle Sam wants you to send your delicious American craft beer across the sea, so he made available to you a tax exempt entity known as the IC-DISC, which is relatively inexpensive to setup and maintain.

Intro to the IC-DISC

Its long name is the Interest Charge Domestic International Sales Corporation (IC-DISC). There are two types of IC-DISC entities: a commission agent and a buy/sell DISC. This article will focus on the commission only DISC as it is the simplest and often most cost effective. The commission only DISC acts as a commission agent on behalf of your business. It runs in parallel to your existing operating business and comes into play when your beer is exported. Even if you indirectly export your brew by utilizing a distributor, as long as you know your beer is going abroad, you may qualify for this tax saving opportunity.

What is the incentive and benefit?

By acting as an export agent on your behalf, the IC-DISC entity is entitled to a commission, which is a deduction to your main operating business at ordinary income tax rates. The commission received by the IC-DISC, which is tax exempt, is then paid out as a dividend to its shareholders. Therefore, the IC-DISC is converting a portion of your export net income subject to ordinary income tax rates to qualified dividend rates on the dividends being paid to its shareholders.

How do you determine the commission and dividend? There are two primary methods. The first method is 4 percent of the qualified export receipts and the second method, 50 percent of export net income. The first method is simple, a straight 4 percent on foreign sales. However, while the second method requires some more work, it often results in a higher commission paid to the IC-DISC and therefore more export income converted into dividends.

Illustration of the benefits

Pat is the owner of a brewery who wants to grow his brand abroad. At the advice of his accountant, he created a commission only IC-DISC entity. Pat’s current brewery is as an S-Corp. The beer Pat plans to ship abroad will be his flagship brew that is currently priced to yield a 60 percent gross profit margin. At the end of the year, Pat’s business had international revenue of $300,000.

First, we need to determine the commission to be paid to the IC-DISC. You can see from the table below that using the 50 percent method results in a commission amount of $90,000 which provides a much greater benefit versus the 4 percent method as illustrated below:

Second, because Pat’s brewery is an S-Corporation, the business income flows through to Pat. By utilization of the IC-DISC entity, you can see how a portion of his reported business income is converted into qualified dividends, however total taxable income remains the same.

You will notice that in total, taxable income is the same. But, business net income is subject to higher tax rates than qualified dividends received. Now, assuming Pat is in the highest tax bracket of 39.6 percent with a qualified dividend rate of 23.8 percent, his savings at the end of the day is:

Is it worth it?

At the end of the day, Pat saved $14,220, and this is assuming he is in the highest tax bracket! For most, if not all brewers, $14,220 is a lot of cash that can be put to good use. Also, remember this is a fairly cheap way to save cash with very little paperwork or effort.

There are other benefits as well. These include giving key employees or sales team members an ownership interest in the IC-DISC entity, motivating them to sell more abroad and grow those untapped markets. Or, you don’t want to take the dividend and rather keep the cash in your business. Not a problem: The IC-DISC entity can loan the proceeds back to the operating entity, effectively deferring tax. However, the IRS requires that you pay interest, but not to worry — the rates are low because they are tied to U.S. Treasury bills.

Bottom Line

If you are sending your beer or equipment manufactured here in the states to another country, it is worth looking into setting up an IC-DISC entity to reduce your tax burden. There are also more complex IC-DISC planning methodologies that may offer greater savings in cases where the benefits outweigh the additional costs as well. It is important to note that these vehicles cannot be used retroactively and need to be established as soon as possible to start utilizing and taking advantage of the savings offered.

This article was as originally published on Craftbrewingbusiness.com.

---

Robert Babine, CPA, a principal in the Boston accounting firm Edelstein & Company LLP, advises craft beer industry leaders, as well technology, retail, professional services, manufacturing and other privately held entities with complex accounting and operations issues.

Mass Brewers Guild Hosts First New Brewery Bootcamp

60 attendees sell out Conference to Learn from Experts 

Yesterday, at the Springdale Barrel Room in Framingham, MA, a crowd of 60 new breweries and breweries in-planning gathered at the "New Brewery Bootcamp," a full day seminar offered through the Mass Brewers Guild. 

The afternoon covered topics such as employee law, insurance risks, taxes, distribution, real estate leases, waste water management and more. Experts from Bowditch and Dewey Attorneys, Bernstein Shur Law Firm, Edelstein & Company CPAs, GHM Insurance, and Weston & Sampson shared their best practices and advice for navigating the industry. 

Co-founder of Jack's Abby Craft Lagers and Mass Brewers Guild treasurer, Sam Hendler, presented on the challenges of getting beer to market, and president of the Mass Brewers Guild and co-founder of Night Shift Brewing, Rob Burns, spoke candidly about his growing pains as an experienced brewer and entrepreneur. 

"This conference was born out of popular demand and a need in the Massachusetts craft beer industry," says Rob Burns, co-founder of Night Shift Brewing and president of the Mass Brewers Guild. "There are 30 breweries in-planning slated to open this year and we want to provide these budding entrepreneurs with the resources they need to remain successful, independent businesses. Opening a brewery is about more than brewing great beer." 

The sold out, ticketed event helped to raise $1,000 for the Mass Brewers Guild, a nonprofit organization that works to protect and promote the interests of craft brewers across the Commonwealth. Due to its success organizers say it will become a yearly program. 

To date, more than 122 breweries exist across the state and employ more than 3,000 locals. MA craft breweries drive traffic and tourism to the Commonwealth and pour world-class craft beer to thirsty locals and travelers. Massachusetts’ breweries are ranked among the best in the world, country and region, with accolades and awards being announced weekly.

For more information about the Mass Brewers Guild, or its upcoming events, visit MassBrewersGuild.org.