30 Sep Finding Help With the Taxing Issues of Brewing
Craft beer festivals serve many purposes. They introduce drinkers to beers, styles, and breweries, helping them become more sophisticated consumers. Festivals are used by breweries to build brand recognition and draw people to their taprooms. Organizers use festivals to draw attention to issues and causes, and to raise money for charities and other worthy causes. I guess a small number of festivals are for profit, put on by large companies without a charity partner, but this is a small minority of events – think Bacon & Beer Festival.
Somewhat less overt yet still important – festivals are used to help build community, amongst drinkers, amongst brewers and drinkers, and even amongst brewers/breweries. Many a collaboration has been conceived at these festival meetings, especially at the larger festivals that draw breweries from around the country. Finally, businesses in, around, and outside of craft beer choose to be part of festivals as sponsors or partners in order to put their products or services in front of the participating breweries, the attendees, or both. We have seen towns sponsor festivals just to draw a taproom to their location or promote the town itself to potential residents.
Some sponsors make brewing equipment – that makes sense. Others are focused on home improvement or personal services like real estate or perhaps car sales. These are aimed directly at the people at the festival; of course, brewers are people too so you could say they target everyone. Finally, there are sponsors for services that may apply to the breweries. POS systems, insurance companies or law firms that act on the behalf of breweries. It is in this capacity that Somerset CPAs & Advisors is again the title sponsor of Hendricks County Hoppy Halloween Craft Beer Festival in Plainfield on October 20th.
Somerset CPAs was the main sponsor at the inaugural event last year; their return must mean that this sponsorship gig can pay off – after all, CPAs aren’t going to waste money. Somerset has both professional and personal account representatives, and a special arm of their business specializes in the financial and regulatory needs of breweries, restaurants, and bars. As such, they can use the festival to connect with both the people drinking and the people pouring.
That’s a particularly mercenary way of looking at things, but business is serious; it just happens to be a nice thing that the folks at Somerset also really like craft beer and craft brewers. This is why they started the special arm related to breweries in specific. Of course, the relationship can work the other way too. Craft beer drinkers and breweries like to do business with companies that have a penchant for their industry and/or hobby, so sponsorship of a public event like a festival can work out better than just sponsoring a convention or meeting that targets only the breweries.
Somerset has been taking on new brewery clients this past year even though they have had brewery/restaurant/bar clients in the past. Nevertheless, Jordan Sublette, CPA for Somerset told me recently, “We have learned to understand the industry so much more in this past year, we are now even better prepared to help breweries be efficient with the financial and regulatory aspects of their business.” One of the differences is that they formalized the specialization arm in 2012 and that means that they are taking industry specific continuing education classes. They don’t expect breweries to educate them about their issues, Somerset goes out and gets the knowledge so they can focus on specific solutions. This makes them of particular use to people out of their comfort zone and looking for a way that they can focus on making beer without worrying about missing some crucial point or way to save money. It doesn’t take much wasted money to seal the fate of a brewery.
The tax relief and reduced regulation put into law in 2018 has resulted in several new ways for breweries to save money, and none of these have been missed by Somerset. I sat down to talk about it last week with Somerset. I have to say, I find it a bit strange when people can have this much enthusiasm for tax and regulation issues, but I’m glad they do – it keeps us from needing to worrying about them. Becky Fromm Quintana, CPA, Principal CPA Jay Feller, and Jordan got wide eyed and spoke in glowing tones as they discussed with the new ways they have found to let brewers just worry about beer.
For example, under the new tax plan, the 199A deduction permits you to save some taxes when you become profitable, allowing for a 20% deduction flow through to the owners. This means that some of those profits can be churned back into the business to help it grow, rather than just having the government scoop off the top and stifle growth. The new tax code also allows you to expense used equipment at a 100% level to generate more deductions. Previously one could only do this with new equipment purchased. For many business types this wouldn’t matter, but Somerset knows brewing and understands that many breweries routinely buy used equipment.
For breweries in planning or looking to bring in new capital, the new tax laws have a benefit as well. When a person is looking to invest capital in a new business, they often sell off an asset to free up the money. Many brewery investors are actually in another business and move money around when they decide to be silent partners in breweries. Previous to this year, the money made by selling an asset would be taxed, and the remaining money could then be invested – but starting this year, money moved from one investment to another isn’t taxed.
For breweries in planning and for those looking to expand to a second location (and that’s alot of them), there’s a new crack in the tax dam for them as well. If you choose to locate your new taproom in a “qualified work opportunity zone,” then you can defer alot of the taxes associated with the location over several of the coming years. These zones are located throughout the state, and this technique for positioning breweries within them will free up capital for build outs and running the operations.
One of the last examples Becky, Jay, and Jordan discussed with me (they have more new tips, but my head was starting to hurt) has to do with allocating losses to the partners of a business when it is new. Many breweries have both major and minor investors, with the profits being allocated proportionally, if there are any profits. In most cases, the losses incurred by a brewery (or other business) are shared equally by all the partners because many accounting firms don’t understand the rules and the importance for a business to be in start up mode when the losses occur. In truth, the regulations allow more of the losses to be allocated to the major partners, so that they can enjoy a proportional amount the tax relief afforded by the law to individuals when their investments initially lose money.
I had a hard time wrapping my head around this – aren’t losses a bad thing and more loss would be worse? Well yes, in the scheme of making money it is, but losses are a tax protection, to be deducted from investment or income. By investing more, you really should be able to deduct more of the losses. Like I said, my head was starting to hurt toward the end of our discussion.
There are those brewery owners that have no problem with these types of subjects, like Jesse at Black Circle or Leah and Nathan at Taxman. But for the majority of brewery folks, these regulations and the myriad ways to waste money are confusing and you just wish there was someone you could trust in answering these questions and handling these issues. Now you do, Somerset is working all the time to make sure you money is going the farthest and you are within the letter of the law.
But Somerset is ready to expand now. They are starting to work with distributors and other business models that work on the fringes of craft beer. They have much to offer along those lines; for example, they can help employers find ways to keep good employees without wrapping up so much money on the front end. Through structuring compensation and incentive programs for long-term payoff (back loading), employees get the recognition and rewards they deserve, without breaking the financial backs of their employers to do so. Jay referred to them as “golden handcuffs;” both the employer and the employee are happily tied together.
Somerset CPAs has made big leaps in recent years; craft beer has become a bigger part of what they do, and they have become very good at it. It may be a specialty for them, but they haven’t got big headed about it. They are still (and always will be) willing to work with breweries on a tentative basis. They do more up front to show they can be of help while charging little, and then make it up as your relationship matures and you are on more stable financial ground. This is yet another example of how Somerset has the best interest of breweries in mind, and when you own a small business, it’s nice to have people looking out for you.