Ask a CPA: Q&A (Part I)

This article consists of a set of questions asked by our readers being answered by Chris Farmand, a CPA who helps breweries with several accounting and accounting-related issues (view his full bio below).  This is the second article in a continuing series of articles Ask a CPA where Chris provides a few basic tips for breweries to establish and maintain effective accounting systems.  Due to an overwhelming amount of responses, only some of the questions that were submitted are included below.  I expect to post Part II in the near future.

Ask a CPA: Q&A (Part I)

What is the most common misunderstood tax issue for breweries?

A painless and prosperous tax season breaks down to two points: 1) financial statement prep and 2) tax credits.

–Financial Statement Prep – If the back-office is in order, financial statement preparation shouldn’t be a problem.  With all its moving parts, it is easy for this area of the brewery to be a mess.   One common issue I encounter is finding a qualified accountant to handle the nuances that accompany brewery accounting.  A strong background in manufacturing and retail is needed.  Remember the IRS does not care what your gross profit on a barrel of beer is, they just want the numbers.  Internal management should be concerned with the details.  So, once again, a CPA who can distinguish between what numbers are important to the IRS and owners; its a balance.

–Tax Credits – This is another area which needs careful planning so the brewery maximizes the potential benefit.  Some tax preparers are uncomfortable with taking these credits because they are misunderstood and complicated.  These credits require specific support to calculate.  Which takes us back to the first point, have your back-office in order, it will pay off.  Find a preparer who understands them and will work it for you.

When charging a glass deposit on growlers - should this be done with a simultaneous debit/credit to sales and some kind of Deposits Payable account? I assume you can't count it as revenue alone. At what point, if any, can you write off a chunk of the deposits payable as glass that's never coming back?

I am a strong proponent of moving away from growler rentals.  I believe growlers should bare your logo and be sold rather than rented.  This will ensure your brewery stays top of mind anytime someone looks at the glass.  Also, people tend to take care of their own things better than rented things, don’t you?

However if you must rent them… There should be a separate key on your POS system for growler deposits.  When one is purchased, select the beer, the growler deposit and swipe the card for the total amount.  When the days accounting occurs, the growler rental does go into a “Growler Deposit” account, and sits there until the growler returns.  As for the policy on revenue recognition.  This is up to the brewery and can be set as an internal policy.  “If a growler is not returned in XX days, your deposit will be lost.”  How you track this info is up to you.  

Can a new brewery write off their brewing supplies for test batches (ingredients, equipment) before they open their brewery? For tax purposes, does it matter how they dispose of this beer (drink themselves, give to friends)?

Good question!  Yes, assuming the business is registered, a bank account is open, and there is forward progress on getting the brewery open.  If all these are true, then I would definitely consider these startup expenses.  I would also document the steps so I could capture some Research and Development credit.  As for the disposal of the beer, I would drink it and have friends and colleagues over for taste tests.  You can’t begin selling your beer without the TTB and state licenses.  The bottom line, if there is the intention to start a brewery, definitely yes, otherwise you could be treading in Hobby waters.

What happens when the TTB audits a brewery?

If you happen to get a notice from the TTB that they want to pay a visit to your brewery there are a few things you need to be aware of.  First, the TTB is not out to close you down, they are there to do their job and in most cases help you.  I believe they are a group of very nice people.  I have spoken to them on a number of occasions and they have been prompt and helpful.  Second, an audit is usually random.  There are instances that can spark an audit, but for the most part they are random.  Third, if you get audited, please don’t lie or try to cover a mistake up.  The auditors are human and they understands people make mistakes.  If a mistake is uncovered and it is your first infraction, I am confident they will allow you to correct it without penalty.

So what happens when the auditor shows up.  They most likely will have the Brewers Report of Operations you submitted.  From there they will ask for records to support the numbers on the BRO.  Once they have verified the numbers, they will may take a tour of the brewery to make sure certain items are labeled. See Record-Keeping post.

The most common TTB errors are:

  • No records
  • Incorrect amount of beer returned to brewery
  • Destruction logs missing
  • Lab logs missing
  • Loss and Shortage logs missing
  • Inventory counts!
  • Records not being maintained for 3 years
  • Equipment not labeled (capacity, serial number)
  • Certified equipment (calibrated, tested)

What is the optimum means of maintaining both pub/restaurant sales and beer sales and production?

Currently there is not a single software solution that can handle all the functions of a brewpub/brewery.  I suggest piecing together “best in breed” software to handle the different functions.  For the restaurant, you need a POS that can handle all the functions: Table management, ticket management, time clock, recipes, etc.  The POS market is oversaturated with options, so if you are small enough you may be able to get by with a tablet based option.  If not small, you are going to have to shell out the big bucks for the Aloha’s and MICROS of the world.  On the production side you really only have two options worth talking about: OrchestratedBEER and BeerRun.  BeerRun does have a Brewpub version to handle smaller quantities.  Orchestrated is designed for packaging operations.  From there the info will need to be compiled into a QuickBooks or Peachtree for reporting purposes.  A super advanced QuickBooks user could navigate the production side with the Premiere version of QuickBooks.  So it boils down to selecting a best in breed once you understand what the software needs to do.

Dan’s Input: I would recommend that you work with a CPA like Chris in setting up both the production tracking and accounting software programs.  Doing so will help ensure that your tracking and accounting go smoothly from the get-go.  An accountant should also be able to help you accurately integrate your old data into your new software systems.

As an owner, is it better to pay myself a salary or take a % of monthly profits? Or a combination of both?

Salary; with distributions when the company can afford it.  Biggest pitfall of any business is the owner not paying themselves a fair wage.  First, it leads to skewed numbers.  Second, the owner bleeds the company dry with little discipline.

Dan’s Input: In the book Beer School: Bottling Success at the Brooklyn Brewery, Tom Potter from the Brooklyn Brewery talked at length about how him and co-founder Steve Hindy paid themselves very modest salaries (if any) for the first few years of the brewery’s existence.  This book has great insight into the business side of starting a new brewery.

About Chris

Chris Farmand, proprietor of the Small Batch Standard, is a Certified Public Accountant and Certified Information Technology Professional. He helps new and established breweries prepare and file tax returns, develop financial and accounting plans, select and implement accounting and manufacturing software systems, and more.
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One Response to Ask a CPA: Q&A (Part I)

  1. Pingback: Ask a CPA: CPA Q&A (Part II) | Christopherson IP Law Firm | Beer Lawyer | Trademarks, Contracts, & TTB

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