Tax Incentives for Craft Breweries
Educational Series Session 1
January 13, 2016
Introduction
• Purpose of the Educational Series
• When sessions will occur
• Agenda for this session
– Incremental Research Credit (R&D Credit)
• Matt Mueller
[email protected]
– FICA Tip Credit
• Hugh Huffaker
[email protected]
– Domestic Production Activities Deduction (“DPAD”)
• Matt Page
[email protected]
– State Tax Incentives
• Marty Tschida
[email protected]
The Incremental Research Credit (R&D
Credit)
Matt Mueller – Tax Manager
Incremental Research Credit (“R&D Credit”)
• What is the credit?
– The R&D credit is a general business credit for companies
that incur research costs in their business in the United
States.
• Why is the credit important?
– A tax credit is a dollar for dollar reduction in tax for tax
deductible research costs conducted by a company (you
get the tax credit in addition to being able to deduct the
research costs).
Research costs eligible for the credit
• What research expenses are eligible for the tax
credit?
– In-house research expenses and contract research
expenses incurred in an ongoing business (companies that
are in the start-up phase are not eligible for the credit)
• In-house expenses
– Wages
– Supplies
• Contract research
– Expenses paid to a contractor for research (i.e. contract employee)
– The costs incurred for research activities are eligible for
the credit if the activity and cost meet four tests.
Test #1: Permitted Purpose
• The purpose of the research activity must be to create new (or
improve an existing) functionality, performance, reliability, or
quality of a business component.
– A business component is generally a product, process, technique,
formula, invention, patent, pilot model, or internally developed
software, provided that the component will be used in the
development of a product that will be:
• Held for sale, lease, or license
• Used by the company in their business
• The following research related expenses do not qualify for the
credit:
– Quality control testing
– Advertising or promotions
– Consumer surveys
- Efficiency surveys
- Management studies
- Employee training programs
Test #2: Elimination of Uncertainty
• The intent of the research activity must be to
discover information that would eliminate uncertainty
concerning the development, or improvement, of a
business component.
– Uncertainty exists if the information available to the
company does not establish the capability or method for
developing or improving the business component (i.e. the
outcome of the research is not known, or the results
cannot be ascertained before the research activity is
undertaken)
Test #3: Process of Experimentation
• The research activity must involve a systematic
process designed to evaluate one or more
alternatives (i.e. scientific method) to achieve an
intended result where the method of achieving the
result, or design, is uncertain and unknown prior to
the research being conducted.
• The research will be used to measure the
effectiveness, performance, quality, and reliability of
a new or improved business component.
Test #4: Technological in Nature
• Research must involve a process of experimentation
used to discover information where principles of
physical or biological science, engineering, or
computer science are used
• Technology, science, and principles in the industry
currently in existence may be used in the conduct of
research
– Innovative technology and/or scientific discovery is not
required
– Success of the research in developing a new or improved
business component is not required
Activities That May Qualify for the Credit
•
Activities related to the development and or testing of:
–
Hopping techniques
–
Hop varieties
–
Yeast strains
–
Fermentation processes
–
Bottling or canning processes
–
Bottle, bottle crown, or can designs
–
Keg filling or treatment techniques
–
Ingredient processing techniques
–
Water recycling or waste management processes
–
Filtration techniques
–
Brewing or bottling equipment
–
Product formulations
–
Ingredient mixing methodologies
–
Prototype batches
–
Preservative chemicals
–
Aroma and flavor profiles
Don’t Leave Cash on the Table, Take the
FICA Tip Credit
Hugh Huffaker – Tax Supervisor
Factors Impacting Brewery Growth
§ Cost of brewery equipment
§ Increased competition
§ Cost of employees
FICA Tip Credit
Requirements
§ You had employees who received tips from
customers for providing, delivering, or serving food or
beverages for consumption; and
§ You paid or incurred employer social security and
Medicare taxes on these tips.
Minimum Wage
§ An employer of a tipped employee is only required to
pay $2.13** per hour in direct wages if that amount,
combined with the tips received, equals the
federal minimum wage of $7.25 per hour.
** Some states have higher requirements
Credit Calculation
Step 1: Calculate minimum wage base for employee
(Total Hours Worked) x (Federal Minimum Wage**)
** Calculate Using Old Rate of $5.15 / hr
Credit Calculation
Step 2: Calculate Excess Wages Paid to Employee
Employee’s Annual Earnings **
Less: Employee Minimum Wage Base
Excess Wages
** Includes Hourly Wages & Tips
Credit Calculation
Step 3: Calculate the Tax Credit
(Excess Wages) x (FICA Tax Rate**)
** 7.65% in 2016
Example
Don Johnson is the proprietor of Four Loko Vineyards,
a quaint vineyard located in South Oregon that is
known for its cooler-climate varietals, such as Fuzzy
Navel and Blue Hawaiian. There is a tasting room
located on premise which serves wine and food to the
guests. One of the employees who has been with Don
since the 80’s, Ricardo “Rico” Tubbs, earned $31,200
in tips during the year ($600 weekly average) and
$3,750 in hourly wages (1,500 hrs x $2.50).
Example
Minimum Wage Base
(1,500 Hours) x $5.15 = $7,725
Employer’s Excess Wages
($31,200+$3,750) - $7,725 = $27,225
FICA Taxes Paid by Employer on Excess Wages
$27,225 x 7.65% = $2,083
Example
Total Tax Credit = $2,083
Sec. 199: Domestic Production Activities
Deduction
Matt Page – Tax Supervisor
Agenda
• History
• Eligibility/Qualifying Activities
• Domestic Productions Gross Receipts (DPGR)
• Qualified Production Activities Income (QPAI)
• W-2 Wages Limitation
• Examples
History
• Established by the American Jobs Creation Act of 2004
• Allows for a tax break for businesses that perform
domestic manufacturing and certain other production
activities
• Attempt to ease the burden of domestic manufacturers
and incentivize the investment in domestic manufacturing
facilities
• Deduction is allowed for individuals, C corporations,
farming coops, estates, trusts and their beneficiaries
• Deduction also allowed at the partner, member, and
owner level for a partnership, LLC, and S Corporation
Activities Eligible for Sec. 199
• Deduction is available to the following:
–
Manufacturers
–
Developers
–
Producers
–
Growers of agricultural products
–
Producers of qualified films
–
Producers of electricity, natural gas, or portable water
–
Businesses that extract minerals
–
Contractors
–
Engineers
–
Architects
–
Installers
–
Other taxpayers that derive income from the qualified production activities performed in the
United States
• Think MPGE
Brewery Activities
• Brewery activities are related to the manufacturing,
production, growth, or extraction of food and
beverage products and qualify as domestic
production activities
Food Processing And Retail Food Sales
• Food processing is usually a qualified production activity, but the sale of food
and beverages prepared by a taxpayer at a retail establishment is not
• A retail establishment is defined as tangible property (both real and personal)
leased, occupied, or otherwise used by the taxpayer in its trade or business
of selling food or beverages to the public at which retail sales are made
• While producers of distilled spirits, wines, and beer may conduct retail sales
of their products on their premises, such sales do not transform the entire
premises of the distilled spirits plant, bonded wine cellar/bonded winery or
brewery into a retail establishment
• Accordingly, the sales of such wine or taxpaid beer or taxpaid distilled spirits
will be treated as DPGR for purposes of section 199 (assuming all other
requirements of Sec. 199(c) are met)
• Taxpayers must determine what portion of their total gross receipts is DPGR,
and what portion is not
Amount of Deduction
• Years 2004 – 2006: Three percent
• Years 2007 – 2009: Six percent
• 2010 and after: Nine percent
• Deduction is equal to 9% of the lesser of:
– Qualified Productions Activity Income (QPAI)
OR
– Taxable Income
Domestic Production Gross Receipts (DPGR)
• Only gross receipts derived from qualifying
production activities can be treated as DPGR
• Taxpayers must determine what portion of their total
gross receipts is DPGR, and what portion is not
• Receipts for the year that are recognized under the
taxpayer’s method of accounting used for federal
income tax purposes
DPGR Cont’d
• Gross receipts include:
– Total sales (net of returns and allowances)
– All amounts received for services
– Income from investments
– Income from incidental or outside sources
– Interest, tax-exempt interest on state and local bonds,
dividends, royalties, and rents
DPGR Cont’d
• Gross receipts do not include:
– Amounts received in repayment of a loan
– Gross receipts from a non-recognized transaction (likekind exchange)
– Amounts received by the taxpayer with respect to sales tax
or similar state and local taxes (if imposed on purchaser of
good or service and taxpayer merely collects and remits)
Qualified Productions Activity Income (QPAI)
• Equal to domestic production gross receipts (DPGR),
reduced by the cost of goods sold and other
deductions, expenses and losses that are properly
allocable to those receipts
• Taxpayer must determine what portion of its total
gross receipts is DPGR, and what portion is not
• Income and expenses that are not directly related to
qualifying activities will need to be backed out of the
calculation for QPAI
W-2 Wages Limitation
• After the lesser of DPGR or taxable income is
multiplied by the 9%, the deduction is further
limited to 50% of Form W-2 wages
• Only wages paid to employees of the taxpayer are
included in the term “W-2 Wages”
• “Employee” includes an officer of a corporation
• W-2 Wages does not include self-employment
income
• May only include wages that are properly allocable to
DPGR
Examples
• Example #1: For the year ended December 31,
2015, John Doe’s Brewery (a C-corp) had taxable
income, all from qualifying manufacturing activities,
of $1,000,000 and paid $100,000 in W-2 wages
• Example #1 Solution: John Doe will be entitled to a
Sec. 199 deduction of $50,000 due to the 50% limit
of W-2 wages. If the W-2 wages had been greater
than $180,000, the deduction would have been
$90,000 [$1 mil x 9%]
Examples Cont’d
• Example #2: Same facts as #1 ($180,000 W-2
wages), except that John Doe Brewery is a S-corp,
with John Doe owning 60% and Jane Doe owning
40%
• Example #2 Solution: The deduction passes through
to the shareholders, with John receiving $54,000 and
Jane receiving $36,000 of the deduction
Examples Cont’d
• Example #3: Same facts as #2, except that John
takes a $108,000 distribution and Jane takes a
$72,000 distribution. No W-2 wages are paid
• Example #3 Solution: A Sec. 199 deduction cannot
be taken because W-2 wages were not paid
Examples Cont’d
• Example #4: John Doe Brewery (a C-corp) has retail
sales of $100,000 with retail deductions of $50,000
(W-2 wages related to retail sales were $25,000).
John Doe also had wholesale sales of $500,000, with
deductions related to the wholesale sales of
$250,000 of which, $50,000 were W-2 wages.
Taxable Income equals $300,000
• Example #4 Solution: John Doe is entitled to a Sec.
199 deduction of $22,500
• QPAI = $500,000 – $250,000 = $250,000
$250,000 x 9% = $22,500
State and Local Tax Opportunities for
Brewers in Colorado
Marty Tschida – State and Local Tax Manager
Sales and Use Tax on Equipment Purchases
• Brewery Equipment Exempt from Sales Tax in
Colorado
• Savings of 2.9%+ on Every Dollar of Spend
• Exemption Certificate
Sales and Use Tax on Equipment Purchases
• Who Can Receive this Benefit?
– Any Purchaser of Qualifying Equipment
• How Much Money?
– 2.9% of Purchase Amount or More
• How Much Effort?
– Provide Exemption Certificate
– Recoup Previously Spent Dollars
Relocation or Capital Expansion
• Local Jurisdictions Providing Sales Tax and/or
Property Tax Reductions
• Provides for Annual Savings
Relocation or Capital Expansion
• Who Can Receive this Benefit?
– Typically 20+ Jobs
• How Much Money?
– Dependent on Build, Potential for Thousands per Year.
• How Much Effort?
– Involved Application Process
Enterprise Zone Credits
• Colorado Has Established Enterprise Zones Within
the State
• Typically Located in Industrial or Rural Areas
• Provides a Credit on the Colorado State Income Tax
Return
• New Hires, Capital Spend, Training, Employee
Sponsored Health Insurance, R&D, Vacant Building
Rehabilitation
Enterprise Zone Credits
• Who Can Receive This Benefit?
– Based on Location Within a Qualifying Enterprise Zone
• How Much Money?
– $500 -$1,000 Per Employee
• How Much Effort?
– Easy Precertification Process and Record Keeping
Thank you for attending!
• If you have any questions or would like to discuss
any of the topics covered today, please feel free to
contact us at (303) 298-9600. If you prefer to email
one of us, please find our email addresses on the
Introduction slide.
• If you would like to see a particular topic covered in a
future educational session, or have any feedback
regarding today’s presentation, please contact Matt
Mueller by email at [email protected] or by
calling 303-298-9600.