Farm-to-Glass and Farm-to-Keg
In the past few years, farm breweries have made their rise within the craft beer community. We’ve seen the likes of Jester King, Rogue, Stone and others purchase and lease farmland in an effort to secure the supply and quality of their ingredients, and to pay homage to the sustaining principle of localism. Through their own efforts and the efforts of other beer community members, the transparently local supply chain has begun to transcend restaurants. Now, “Farm-to-Keg” and “Farm-to-Glass” is legitimately "a thing." But the appeal has even greater upside than just the on-message aesthetics. The tie to agriculture often gives farm breweries greater flexibility with regard to their operating and accounting structure. With that in mind, here are a few tax tidbits that a brewery should know and consider if managing and running a farm is on tap, too.
Farms use Schedule J (Form 1040) to file their taxes
In addition to your normal yearly taxes for the brewery, a Schedule J tax form is necessary. The upside here is that a Schedule J will allow the farming business to elect an income tax average from its base years to stabilize payment during a high-income year if coming off of a low-income year.
Farmers can deduct ordinary and necessary expenses they paid for the business. The IRS defines an ordinary expense as “a common and accepted cost for that type of business.” And a necessary expense as “a cost that is proper for that business.” So if it makes business sense to vertically integrate your brewery business through farming, these deductions can help mitigate overhead expenses.
Net Operating Losses
If a farm’s annual expenses turn out to be greater than its annual income, it can claim a net operating loss. The benefit here is that this loss can be carried forward to the next year and deducted.
Farm Income Averaging
A Farm can elect to use what is known as Farm Income Averaging. This allows the farm to average all or some of the current year's farm income by shifting it to the three previous years. Connect this concept with the note about Schedule J filings. Farm Income Averaging comes in handy when income from farm activities in a current year is much higher than the income from any source over the previous three years. Electing for Schedule J thus allows the farm to balance its current and ideal tax bracket with the brackets from previous years, so it can avoid being taxed at a significantly higher rate in the current year. However, there are some limitations.
Farm Income Averaging is only available if, in the year of the election, the farm is engaged in the business of farming as an individual, a partner in a partnership, or a shareholder in an S-corporation. Moreover, the IRS states that corporations, partnerships, S-corporations, estates and trusts themselves cannot use farm income averaging. Therefore, Farm Income Averaging would almost certainly be unavailable to the brewery itself. Perhaps, however, some creativity in corporate structure can bridge that gap.
At any rate, if you’re floating the idea of chartering a farm brewery, but feel that it will be necessary to utilize Farm Income Averaging, it may be worth a call to your local beer counsel to strategize. The give-and-take of corporate structure and tax incentives make the farm brewery concept a truly remarkable venture. But it is never one-size-fits-all.
Of course, the law in this area is ever evolving. This article speaks to the growth of the farm brewery trend the changing legal climate from state-to-state, as each attempts to accommodate the growth. As always, we’ll be sure to keep you informed on any changes as they occur here in North Carolina.
Until next week. Cheers!