Most microbreweries and brewpubs should be aware of three tax saving provisions they are most likely eligible for. The provisions consist of two tax credits and one deduction, it is important to have a tax professional position the company to take best advantage of them. The three provisions are:
FICA Tip Credit
Domestic Production Activity Deduction
Research and Development Credit
FICA Tip Credit – For this credit to apply you must have tipped employees. Brewpubs and Microbreweries with taprooms, listen up. The easiest way to explain this is, reported tips are subject to FICA. The business matches the FICA. Some tipped employees make a lot of money. What the credit does is, recapture some FICA paid for wages that exceed minimum wage. The calculation is quite complicated so just understand if you have tipped employees on a regular basis, you probably qualify. Ask your CPA to explain and nudge your payroll provider to prepare that report.
Domestic Production Activity Deduction – Unlike a credit, this one has some limitations. This deduction says since you are manufacturing something on US soil and are paying wages, we will give you an additional deduction. How much? Up to 9% of qualified production activities. Qualified production activities include wages for production workers (brewery staff) and Cost of Good Sold to name a few. This deduction has a “use it or lose it” clause and is limited by net income. Once again this a super complex calculation and should not be attempted at home. Talk to your CPA.
Research and Development Credit – This credit applies to any research and development you perform on premise. Research and development in a brewery? Think test batches or recipes testing. Some breweries require brewers to develop small “wacky” batches to see if it sticks. The R&D credit must meet a four part test to be valid:
Permitted Purpose – New or help existing process
Elimination of Uncertainty – purpose is to eliminate uncertainty
Process of Experimentation –Systematic process to evaluate one or more alternatives
Technological in Nature – principles of physical, biological, engineering, or computer science.
The biggest thing I can tell you with this credit is document, document, document everything that was involved in the research. Also prepare a sheet which outlines the 4 steps and how they apply to the project. This is the hardest calculation of all, so it goes without saying.
p.s. Some CPA’s are unwilling to take tax credits because they are not up to par on the rules. If you are eligible and do not take it, you are leaving money on the table.