In honor of Chicago Craft Beer Week, here are some tax tips for the fledgling craft brewers out there. Between raising capital, navigating a maze of regulations and developing a great product, there is not much time left to think about taxes. However, it is very important to consider some tax implications of your operations sooner rather than on April 15.
Entity formation should be one of the first things to consider when starting a new business. It is important for legal protection as well as the tax treatment of the activity. Most small businesses are either a limited liability company (LLC), which is taxed as a partnership, or S corporation, which are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.
While both entities provide you with the benefit of flow-through taxation, there are key differences to understand between the two. For example, if your uncle in Belgium wants to give you an old family Tripel recipe in exchange for ownership, this would not work for an S corp, because S corporations are not allowed to have nonresident alien shareholders. However, you can have such an arrangement if your company is an LLC.
Now that you have created a flow-through entity – a legal business entity that passes income on to the owners and/or investors — let’s get down to one of the primary benefits to which you are entitled. Start-up businesses typically operate at a loss in the initial years. With flow-through taxation, this loss can offset your other income or be used to carryback and recover previous years’ taxes paid, thus helping your cash flow. In order to have a deductible loss, you will want to make sure you have basis to deduct the loss. Depending on the type of entity you selected, there are different ways to achieve this.
Depreciation and Expensing
While this is often not the most exciting topic, it has a large impact on your profit and loss statement as well as your balance sheet. Tanks, fermenters, build-outs and other capital assets are subject to depreciation. With depreciation, you get to deduct the cost of the capital asset over a period of time, ranging from immediately to ratably over 40 years, depending on the item and your business. Depending on your situation, you may be better off expensing certain purchases, such as repairs and maintenance, rather than capitalizing. There are many different considerations in this area and it is best to know your options.
Tax Credits & Deduction
Here are a few different credits that craft brewers may qualify for:
- Research and Development Credit – Test batches and recipe tasting can qualify for a tax credit. The key with the credit is to document your process. Also, the credit is based on the supplies used and wages paid. (Please note that currently, the R&D credit has expired, but it is expected to be retroactively extended.)
- Illinois Small Business Hiring Credit – Small employers in Illinois can qualify for a $2,500 tax credit for creating new full-time positions.
- FICA Tip Credit – If you have a taproom or brewpub, check out this article, Are You Leaving Money on the Table?
- Domestic Production Deduction – Although not a credit, this can provide a 9% deduction of your net income. Once you become profitable would be time to consider this deduction.
The beer industry already faces stifling excise taxes, so be sure to take advantage of all the income tax breaks that are available. If you have any questions or would like additional information, we can help. Please contact Rob Swenson at [email protected] or call him at 312.670.7444.