In 2017 I attended the Brewery Accelerator Workshop in San Diego, California and was available to answer pre-workshop questions for brewery CFOs. The topics included taxes and compliance, outsourced accounting vs. home-grown operations, start-up capital, and operational accounting.
Part 1 starts with taxes and compliance questions.
Q: What can we anticipate will be taxed?
A: It will depend on where you live. Taxation follows governance and almost every governing body can level a tax. Generally, there are Federal Taxes (excise and income), State Taxes (income, sales AND USE, and sometimes excise) and Local Taxes (property, sales AND USE and sometimes income or licensing). You can’t get rid of state and local taxes, but the big question is what to do with the income. Most breweries are incorporating using a “pass-through” tax structure. That means that the income of the brewery will flow through to the owner’s returns. You save on double-taxation, but you add a level of complexity to the owner’s personal returns that needs to be understood.
Q: What is the appropriate depreciation on brewery equipment?
A: I like to look at book depreciation when reviewing financial statements. It provides a fairer reflection of the balance sheet (if you believe that stainless only has a 7-year life), but it is better than tax depreciation (which uses accelerated depreciation). That being said, I’m seeing more and more income statements move depreciation and amortization to the other expense section of the income statement. That will give you a true “income from operations” before the effect of non-cash charges.
To answer your question, I like to see 7-year straight line depreciation on brewing equipment. How are you planning to capture the associated costs (electrical and plumbing)? What capitalization policy are you planning to implement?
Q: How do I manage and report tax demands on product?
A: I will assume this question is about excise tax. I’ve reported using a computer system and by hand. If you are talking about beer, I believe that the beer is taxed once “it is removed for consumption or sale”. That means different things to different people. I’ve seen breweries calculate on the whole brite tank volume (over assessing tax in my opinion) and I’ve seen breweries use invoiced volume to level the tax (best definition of removal I’ve ever seen). It is obviously easier to have a system do the calculations for you, but you must have confidence in the system before you can trust the system’s reports. “With great power comes great responsibility…”
Q: Does my manufacturing component qualify for tax exempt status?
A: If this is referring to manufacturing loss, no, excise is levied on “removal for consumption or sale”. See above.
Q: What are some common mistakes in tax planning?
A: Not understanding the whole picture AND that every large change will change the picture. That is why I like to have my tax CPA on board at every client meeting and I will bring them in on every large deal. They spend their entire lives living the tax code. It is really nice to plug into that mindset before a large decision.
It is important to understand that you will be running a multi-million dollar business (hopefully!) and that will bring a very large tax bill. The rub is that all of the value of the company is IN the company and is not very available to pay a large tax bill. Just about every owner I’ve ever worked with will be presented with a large tax bill in year two and they get extremely upset.
They ask me, “How can I give half of my earnings to the government when all of the cast is invested in stainless? Does the government know that we are just trying to get a business up and running?” To which I always answer “This is a country with a legal system that will enforce your contracts, gives you good roads to drive on and a chance to build a great brewery. You’ve built value in the business that is taxable.” It is important to plan for that tax bill.