taxes

Brewing Benefits

By: Taylor Kotas, R&D Tax Credit Consultant at Leyton

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Beer drinkers have had a significant reason to raise their glass and rejoice because new craft breweries open their doors across the US every day. The significant growth in the number of breweries year after year has created an environment where, as a brewer, you cannot sit still.  Innovation has become the lifeblood to brewing success.

Innovation can come from anywhere within a brewery – recipes, label artwork, unique taproom environments, production line processes.  However, certain types of innovation can benefit the brewery in more ways than originally intended, and one of the more surprising ways is by lowering income and payroll taxes.  

Breweries can reduce tax liability through the Credit for Increasing Research Activities, which is both a Federal and Massachusetts State Credit.  Although you might not think that breweries perform R&D, or at least not enough to be significant, necessary day-to-day operations are packed with R&D eligible activities.

From brewing and releasing new beers to incorporating new equipment into a production line, both have aspects of R&D that breweries can monetize through the R&D Credit.  For these R&D activities you can recapture the financial investments in raw materials such as hops, fruit infusion varietals, even cans, as well as the investment of employees’ time performing, supervising and supporting the R&D.

There is no doubt that a number of breweries across Massachusetts are already taking advantage of the R&D Credit, but this innovation incentive has flown under the radar for decades because it wasn’t a permanent tax credit until 2015.  The PATH Act changed everything - it established the permanence of the R&D Tax Credit so breweries can build it into their financial plans year on year and rely on it to assist cash flow.  

The Federal R&D Credit allows breweries to claim for R&D related expenses in the current tax year, as well as retroactively for the past three (3) years, making the first time you claim potentiallyfour timesmore lucrative than a single year claim.  This credit allows businesses to reduce, or potentially eliminate income tax liability and provide cash refunds for overpaid tax liability when you claim retroactively.  

With the capital investment required to open a brewery, it might take a couple years to be profitable so the standard R&D Credit will not give you an immediate benefit. Fortunately, for the newer breweries, there is a startup version of the R&D Credit.  Rather than reducing income tax liability, you can claim the Federal Payroll Credit to reduce the brewery’s payroll tax liability, which is generated from having W2 employees and is often one of the earliest expenses that a craft brewery incurs.

Being located in Massachusetts also has its perks because the state credit is one of the most generous across the US.  It operates in a similar manner to the standard R&D Credit, but rather than reducing income tax liability, it allows you to lower your excise tax liability.

With the number of breweries growing not only in Massachusetts, but across the entire US, the need to innovate continues to increase. If you innovate to stay at the forefront of your industry, you need to take advantage of the tax incentives that are out there.  It can sound almost too good to be true, but, in reality, you’re brewing more than just beer, you’re brewing tax benefits too!  

Unique Tax Breaks for Breweries

Is your business familiar with the unique tax breaks available in the brewery industry?  AAFCPAs has provided for your convenience the top five tax insights that could have a major impact on reducing your tax burden:

Section 179 Depreciation

Breweries are capital intensive businesses, and equipment investments can be significant. Section 179 allows breweries to deduct the property placed in service in the year of acquisition as opposed to depreciating it over its useful life. There are dollar limitations on how much you may deduct in a single year, as well as business income limits, so we encourage you to consult your AAFCPAs tax partner.

Bonus Depreciation

Breweries may also take an additional 50% bonus depreciation deduction for qualifying property in the year the property is placed in service. There is no business income limitation for bonus depreciation, so in the early stages of business that often result in net operating losses, these can be carried forward to offset future taxable income.

Cost Segregation Studies

The shorter life span attributable to capital purchases, the quicker your company may realize the tax benefit. For build outs of your brewery, AAFCPAs recommends that you evaluate the benefits of a cost segregation study. In a cost segregation study, certain commercial building costs may be reclassified to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.  This may add up to substantial savings


Domestic Production Activities Deduction (DPAD)

The DPAD is a 9% deduction on qualified production activities, which could equate to a 3% reduction in your tax rate depending on the tax bracket the company falls in.

Research & Development Tax Credit

A credit is always better than a deduction, but AAFCPAs recommends a cost benefit analysis be performed to ensure it makes sense to take the credit. Breweries can qualify for R&D tax credits for certain activities such as improving brewing processes or creating a new beer.

When applying the above tax benefits, note that they are specific to brewing operations.  The existence of ancillary businesses, such as restaurants, retail, etc. may impact your ability to utilize them. In addition, certain states make tax benefits available to brewers who locate within their borders.

If you have any questions or need additional information, please contact Dan Stanhope, CPA, MSA at (774) 512-4134, dstanhope@aafcpa.com.

 

Dan Stanhope, CPA, is a partner at AAFCPAs based in Westboro, Boston and Wellesley. He has over 12 years of experience providing tax, assurance and business advisory solutions to closely owned, privately-held businesses. Dan can be reached at  774-512-4134  and at  dstanhope@aafcpa.com    

Dan Stanhope, CPA, is a partner at AAFCPAs based in Westboro, Boston and Wellesley. He has over 12 years of experience providing tax, assurance and business advisory solutions to closely owned, privately-held businesses. Dan can be reached at 774-512-4134 and at dstanhope@aafcpa.com