Tax Considerations for Breweries

Ryan Sanger from ACM 970.352.1700 rsanger@acmllp.com.

Colorado is home to over 10% of the nation’s craft breweries with 200 craft breweries located within the state.   The state hosts national events such as the Great American Beer Festival and whether hobby or business, what happens in Colorado has an impact on the brewing industry as a whole.  As with any other booming industry, there are both challenges and opportunities from a tax planning perspective.   Regardless of whether you are crafting beers as a hobby or exquisitely perfecting a recipes to be sold in a brewery, it is important to understand the opportunities and challenges related to brewing in order to take advantage of tax savings and avoid tax liabilities.

Tax Advantages for Breweries

There are a few tax advantages for breweries that may result in major tax savings if the proper planning and execution takes place. Although these strategies can be very complex, the outcome can be very rewarding.  Some of these tax provisions include:

  • Domestic Production Activity Deduction
  • Research and Development Credit
  • Cost Segregation Study
  • State Sales Tax Exemption

The Domestic Production Activity Deduction is one tax opportunity that provides a nine percent (9%) deduction of qualified production activities and is often missed. This deduction is allowed if you are manufacturing a product on U.S. soil and are paying wages. This deduction often is beneficial for brewery owners but does have certain limitations.

Whether a brewery is testing a new recipe or engineering a method for improved brewing processes, the Research and Development Credit is often extremely beneficial. There are four simple criteria that must be met,   which allow for a deduction of the expenditures in the tax year which they were were paid or incurred. Planning is critical to receiving this credit as supporting documentation is required.  

Many breweries find that as production increases they require more space leading to expansion in their current space or a possible move to a new location.   A Cost Segregation Study allows for a breakdown of these costs and accelerates the depreciation in order to receive the tax benefits sooner.

State and Local taxes should not be overlooked in the tax planning process. Did you know?

  • There is a state sales tax exemption for buying manufacturing equipment.
  • Some cities follow the state guidelines, but some have created their own exemptions and deductions.

 

Advanced tax planning with a qualified CPA is critical to maximizing tax efficiency.  

Unique Challenges

Every business has unique liabilities that they need to be aware of and breweries are no exception.   With proper tax planning, certain taxes and other challenges related to issues below can be properly accounted for to minimize exposure for non-compliance.  

  • Excise Taxes
  • Multi-State Income Tax Filings
  • Sales Tax on Merchandise Sales and Use Tax on Promotional items
  • Distribution

Distribution becomes an important business issue that breweries face as they grow.  Small breweries initially meet the production demands of their taproom and then begin self-distributing. As breweries grow, they typically engage distributors, which may result in reduced margins and more complicated agreements.  Once distribution expands, this may trigger Sales and Use tax requirements in additional jurisdictions.  From a business and tax planning perspective, it is important to have a growth plan that accounts for revenue related to taproom, liquor store shelves, and restaurant taps.

Colorado’s entrepreneurial spirit is strong and craft breweries is one way this spirit is demonstrated. People all over the state are seeking out the best breweries and we understand that there is both a business and an art to running a great craft brewery.   We enjoy assisting breweries in achieving their dreams by helping ensure tax efficiency so they can focus on the craft.   Should you have any questions or want to discuss how we can assist you, I can be reached at 970.352.1700 or at rsanger@acmllp.com.