Ideas to Reduce your Taxes – Draughts & Ledgers, Ltd

You Make Beer – That’s Domestic Production

The federal tax code incentivizes businesses to produce goods domestically instead of off-shoring that production. And making beer is actually producing beer. Your fundamental business activity qualifies you for what is called a Section 199 Domestic Production Activities Deduction.

Claimed on Form 8903, it is calculated based on what is called production activities net income. This is essentially all of the revenue generated by selling beer (directly in a taproom or via wholesale accounts) minus the direct and attributable costs of producing & selling the beer sold. Multiply this number by 9% and score a well-deserved deduction directly from your tax liability!

Keep in mind that side businesses such as selling prepared foods or merchandise are not production activities and must be excluded. Similarly, the labor and associated overhead devoted to these activities must also be excluded. Fortunately, smaller businesses generating less than $5 million dollars in gross revenue can use a simplified equation to proportionally allocate these expenses.

One more thing to keep in mind is that this deduction is capped at 9% of 50% of W2 wages. So, if you do it all with a very small crew or rely on fellow stakeholders, you may find this deduction capped. There is a way to make the compensation of stakeholders (partners or S-corp members) equivalent to W2 income using a portion of W2 wages reported on a K1. You’d need to consult with your tax preparer for the specifics. Still, it’s pretty unlikely you’d run into this cap unless you have an unfathomably profitable operation. Consider that if your production activity net income is $100,000. 9% of this is $9,000. So, if you paid a part-time employee $18,000 in that year, you’ve satisfied this cap.

Tax analysts estimate that this deduction is equivalent to a 3% gross reduction in taxes for qualifying businesses. While it helps at the federal level, many states have found that they are actually losers in allowing this deduction at the state level (due to it being applicable across state lines), so a number of states, including New York, Connecticut, Massachusetts, New Hampshire, and Maine disallow it when filing your state taxes. Just one more thing for your tax preparer to keep track of!

Keeping track of and categorizing the information that informs the production activities net income is something that a quality bookkeeper like Draughts & Ledgers do as part of the basic level of service provided! If we can’t kill your taxable income with Section 179, we’ll help keep it as low as possible so that you can continue to invest in the brewery you’ve always dreamed of!

Making Your Equipment Work for You

Your brewery has a lot of expensive equipment in it. Did you know that it not only helps you make great beer, but it could also reduce your tax liability? It can, using what is called a Section 179 Equipment Deduction.

Most of the time, when you buy a piece of durable equipment, you can “write off” only a little at a time over the expected lifetime of that equipment. This is called depreciation. To illustrate this, consider a $50,000 bright tank written off in $10,000 chucks over 5 years. So every year, you’d get to “spend” $10,000, eliminating $10,000 of revenue, thereby reducing your taxable profits, meaning your tax liability goes down.

What would be much better is to write off the entire cost of the equipment in the year you buy it. This is where Section 179 comes in! The powers that be want to encourage you to buy more equipment this year to become more productive and expand your business, increasing your business and creating jobs. The thinking is that you might add more equipment, and sooner rather than later.

But wait, there’s more! Because of the tax implications, your new equipment is even cheaper than you think! Say you buy $300,000 worth of new equipment. Because of Section 179, you get to write that all off in the year it was purchased. If your company is usually taxed at 35% (a common corporate level), that’s $300,000 * .35 = $105,000 in taxes you no longer have to pay. So, because you bought $300,000 worth of equipment, your tax bill goes down $105,000. So that $300,000 worth of equipment really only cost you $195,000! Isn’t buying more equipment to increase the size of your business a better deal than just raking in the cash (and getting taxed on it)?

There are limits to the equipment you can write off in a given tax year, along with caps on equipment purchases generally. The Section 179 Deduction is supposed to encourage small- and mid-sized businesses, not corporate behemoths. As of this writing (February 2017), businesses can immediately write-off up to $500,000 for up to $2 milllion in equipment purchases. There are rules about what happens if you are between $500,000 and $2 million as well as declining ability to take this deduction as you approach $2.5 million.

So, if you are a successful brewery that is generating an operating profit, consider spending that profit on equipment you’ve always wanted anyway, because if you don’t, you’ll just end up paying more in taxes.