It is that time of year when we must consider income taxes in our brewing business. Just like there are many types of beers, there are also many types of tax deductions and tax credits that your brewing business may qualify for. Below is a list of some of the more common items for you to consider and some of the more commonly missed items.
Section 179 Expense
The section 179 expense allows you to deduct all or part of equipment you purchase in the current year rather than depreciating the cost over the life of the asset.
Domestic Production Activity Deduction - DPAD
This deduction is in place as an incentive to encourage manufacturing on U.S. soil and to as an incentive to paying wages rather than outsourcing. The additional deduction is up to 9 percent of qualified production activities. Qualified production activity expenses include wages for production workers and cost of goods
FICA Tip Credit
The FICA Tip Credit is a general business credit the IRS allows food or beverage businesses to take. This is a tax credit equal to the Social Security and Medicare taxes paid by an employer on certain employees’ tips. There are two requirements to qualify for the
1.The business has employees who received tips from customers for delivering, or serving food or beverages for consumption;
2.During the tax year, the business reported the tip income as taxable employee wages and paid or incurred employer social security and Medicare taxes on the tip.
Research and Development Credit
The R&D credit applies to any research and development you perform on premise. What expenses qualify? The expenses for developing new beer and improving the process of making beer.
The R&D credit must meet a four-part test to be valid:
• Permitted Purpose — New or improve existing process;
• Elimination of Uncertainty — Purpose is to improve consistency of product;
• Process of Experimentation —Systematic process to evaluate one or more alternatives; and
• Technological in Nature — principles of physical, biological, engineering or computer science.
The biggest thing I can tell you with this credit is document everything that was involved in the research. Some examples of documentation are: Receipts for ingredients; process to produce;outcome; taste tester comments, etc. Also, prepare documentation that outlines the four steps and how they apply to the project.
Tax Tips for 2014 and Beyond
So what if you have already filed your returns for 2013? Here are some things to consider.
1. If you missed some of the items listed above, consider having your returns reviewed by an expert in brewery tax to see if amending your returns makes sense.
2. Plan your equipment purchases for 2014 and beyond. Currently the amount of Section 179 expense for 2014 is only $25,000 so it is wise to plan your purchases accordingly.
3. Consider your entity type. Your type of entity can make a significant difference in your taxes and in your eligibility to take the DPAD mentioned above.