Today, I’m really honored to introduce a guest poster on the Brewery Law Blog. Just as Doug and I at Reiser Legal have poured our energy into developing a craft-brewery-focused law practice, Chris Farmand over at Small Batch Standard has devoted his accounting know-how to mastering the tax intricacies and smart savings strategies available to craft breweries. He’s the real deal, and we’ve been glad to connect with someone who shares our passion for helping brewing businesses. Enjoy this helpful information straight from the source. Thanks, Chris!
As year end approaches, certain tax planning strategies should be in-motion for craft breweries. Proper planning could result in major tax savings for the business and owner. There are four tax saving provisions which apply to the beer manufacturing industry. My goal is to make you aware of these benefits, while understanding the actual calculations are complex and should performed by a CPA. It is important that your CPA understand these strategies so they can best advise on how to maximize them. The following provisions consist of three tax credits and one tax deduction:
- FICA Tip Credit
- Domestic Production Activity Deduction
- Research and Development Credit
- State credit and incentives
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. You as the employer must match this FICA amount. 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 throughout the year, you probably qualify.
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 (brewhouse 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. This one takes careful planning to maximize and depending on your size can return some serious dollars to the owners.
Research and Development Credit – This credit applies to any research and development you perform on premise. Research and development in a brewery? R&D can happen in most industries as long as you are trying to improve an existing process. Think test batches or designing new method to handle waste water. 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.
State Credits and Incentives - Most states have a list of business tax credits and incentives. The goal of these are to attract new business or expand existing business within the state. Some examples are: Economic empowerment zones, hiring a veteran, manufacturing & technology focused businesses, to name a few. Most businesses fail to act on them simply because it takes effort to see what programs are available and apply to them. A listing of recent incentives can be researched at your specific states department of revenue website.
My advice on maximizing these opportunities is to not be complacent and ask the right questions. Most CPA’s should be familiar with calculating or researching these credits. Be proactive about these benefits. Investors love to see these credit help them too, they increase the credibility of their investment. Empower an assistant to take 30 minutes a month to research or make a call to see what is available. I can tell you from personal experience these provisions have translated to significant tax saving among fellow brewers.
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 12 years of tax and accounting experience, with the last four years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at email@example.com.
Coppertail Brewing Co., LLC v. Copper Top Brewery, LLC is the latest brewery v. brewery trademark dispute to spill over into federal court. This brewery trademark matter is happening in Florida district court, the Tampa division. According to the complaint, plaintiff Coppertail is a Tampa-based brewery and defendant Coppertop is also a Florida brewery based in Wellington, FL which is on the Atlantic side, aiming to open in Boynton Beach. The complaint was filed on 10/29/2014 and, for those watching on the sidelines, you can find the documents and follow it at Docket No. 8:14-cv-02727 (M.D. Fla.).
We don’t have to spell out the concerns here. But, we will paint the timeline, for those curious about the ins and outs of the dispute. Plaintiff Coppertail filed a trademark on October 23, 2012 and obtained a registration. Per the complaint, Defendant Coppertop is a brewery under construction. It’s a straightforward complaint, alleging trademark infringement and unfair competition under the Lanham Act, while also including a count of trademark infringement under Florida common law. Further, as we always like to report, the complaint does state that the plaintiff Coppertail tried to resolve this matter privately with the defendant start-up brewery.
Also, we’ll note for the detail-oriented that although the defendant is “Copper Top Brewery, LLC” in the caption, the complaint refers the defendant as Coppertop throughout. Indeed, based on the brewery’s own promotional materials and recent articles, including a feature article today (10/31/2014) in the New Times Broward-Palm Beach, the defendant does appear to be using the “Coppertop” mark and not “Copper Top” as it appears in their LLC, Copper Top Brewery, LLC. Notably, too, take a look at the logo materials, with the emphasis on the “C” with quite similar lettering—with the defendant’s C almost giving the same fish tail like appearance that makes up the Coppertail mark.
The key takeaway for us, as always, is the importance of filing an intent-to-use trademark before getting too far along in building out the brewery, getting notoriety in featured articles, and investing too much—financially and emotionally—on a branding direction you may lose. No one wants to be in court, especially not at this early stage of opening a brewery, and taking proper steps to clear and then file a trademark well before launch will go a long way in giving a fledgling brewery brand confidence moving forward. See our notes on trademark clearance here, and here.
As always, we’ll let you know of any notable developments pertinent to the case.
It’s no secret, I’m a big believer in proactive brand protection. To that, I’ve been pleased to see breweries get out in front of trademark issues by asking for early clearance reports for their new beer names, then filing a 1(b) trademark application to secure the name. It’s a big part of what I do at Reiser Legal.
However, I wanted to flag one issue for those working through some potential beer names with the beer attorneys. I’ve recently noticed a number of published trademarks that appear to tout the effects of drinking alcohol. There have been word marks and then also boundary-pushing design marks as well. Bear in mind that, even if a mark makes it past USPTO’s initial review, to get the mark to register, a brewery would eventually have to put that mark into use in interstate commerce. For most breweries, the way to prove that use is packaging and shipping across state lines. But, to package and ship across state lines, you’ll need a TTB-approved label (Certificate of Label Approval, or COLA for short)—even some states require a COLA before getting product into retail in state. Notably, TTB has strict labeling requirements and rejects labels that go too far in touting alcohol’s effects.
In other words, even if a brewery can obtain a federal Notice of Allowance for a beer name, federal (or even state) labeling laws might not allow the brewery to package and ship that beer anywhere but the brewhouse, jeopardizing the ability to actually get that trademark to register. Side note there, as beer-blogging-brethren have noted, TTB has been looser on animals who are appear under the influence than humans.
Keep in mind also that TTB has other bases to reject beer names / labels, and even if they don’t, a state authority may find a boundary-pushing mark or design objectionable. Designs or marks that would draw kids in, for example, are problematic at both levels—which might make some branding angles hard to build out, even if a brewery gets the trademark for the direction it wants its brand to go. Here at Reiser Legal, we love the DIY ethic that pervades the brewing industry. However, sometimes shooting a branding direction to a beer attorney is worth it, before doing too much building out and, worse, investing in a trademark direction that has uncertain label approval chances.
For Doug and I, there’s little more fun than helping out soon-to-be brewery owners very early in the planning process. Doug’s family owns a brewery in Asheville, North Carolina, so he’s been right there, and like many readers here I’m a proud homebrewer with my own aspirations.
When we get on a call to discuss a start-up brewery’s plans, a topic that often comes up is the cost of opening a brewery. That’s understandable, and apart from forum fodder and some speculation, there aren’t too many hard numbers tossed out there to help breweries in general business planning. So, to benefit some hopefuls and help fuel business planning, here are some starting-point figures. Of course, take these for what they are. There’s no rule, and plenty of creative business models work, with breweries getting their doors open (and rapidly expanding) for less than what’s noted. However, it can help to see numbers to get a sense of reality, as a starting point for that business plan.
Here are some general minimum brewery start-up costs:
Nanobrewery Start-up Costs: $50,000
7bbl-10bbl Production Brewery Start-up Costs: $250,000
10bbl-15bbl Brewpub Start-up Costs: $500,000
Packaging and Production Brewery Start-up Costs: $1,000,000
These brewery start-up figures are helpful estimations—but shouldn’t be discouraging. Breweries have achieved significant fundraises, where the founders put in very little (to none) of their own start-up capital. The market is not yet showing signs of stopping, and there are likely many investors out there who are curious about the beer world and willing to jump onboard, so long as a solid business plan and investment structure is in place.
Ultimately, with a savvy CPA and experienced brewery legal team on a start-up’s side, a brewery can get the pieces in place to make a great pitch, and without too much up-front expense either.
So, you’re ready to package. Awesome. What should be top of mind when preparing a Washington-ready beer label? There are a few things to note but, in general, compliance with TTB regulations will get you close to compliant with LCB. However, there are some extra Washington laws and regs to keep in mind.
If a Washington brewery is ready to package and sell—or an out-of-state brewery is interested in beer distribution in the State of Washington—there are certain labeling requirements set forth by the Washington legislature and the Washington Liquor Control Board (LCB). Fortunately, the beer labeling requirements are not particularly cumbersome. Notably, LCB’s direct label approval is not required. However, LCB does require that in-state breweries and out-of-state breweries alike obtain a federally approved label, known as a Certificate of Label Approval (COLA) before getting beer on the shelves. To be ready to ship or distribute beer in Washington, the producer must submit a copy of the federal COLA to LCB and, it goes without saying, have proper licensure. If a brewery makes changes that require a new label approval from TTB, the brewery likewise will have to submit that new label to LCB.
As for Washington’s own beer-labeling requirements, if a brewery is complying with federal regulations, the brewery is likely to be okay under LCB’s approach. However, the LCB does reserve the right to deny any label that doesn’t conform to their basic requirements and rules. What are those? Things you’d expect, and things that the Alcohol and Tobacco Tax and Trade Bureau (TTB) mostly already requires (though LCB and TTB may disagree about some subjective calls). No label can be misleading, you can’t make labels that especially appeal to children, and if you’re going to show adults on the label, the depiction has to be dignified and can’t promote illegal consumption of liquor. There are some other ones, so be sure to review the relevant regs and statutes, or shoot the proposed label to your beer lawyer for a quick review before submission.
As a reminder that regs can be quaint at times, LCB expressly prohibits subliminal messaging on labels or in beer advertising. So, for you crafty cats, make sure there’s nothing up your sleeves.
Last and maybe most notably of all, if a brewery wants to ship strong beer in Washington (that’s over 8% ABV), the brewery must include the ABV amount on the label. This differs from federal requirements, as TTB does not require an ABV statement. Something for producers to keep in mind.