Start-up Insights for New Breweries: Q&A session with Able Seedhouse and Brewery

Start-up Insights for New Breweries: Q&A session with Able Seedhouse and Brewery

Able Seedhouse and Brewery is located in Logan Park, Northeast Minneapolis. They brew a wide range of ales, with a highlight on the grains. They literally, and figuratively, started by planting one seed. That one seed turned into many. They are actively working to grow the seedhouse within their brewery, which includes working with local farmers to grow small grains and malting. 

Between 2011 and 2016, the number of licensed breweries in Minnesota more than quadrupled, according to the Department of Public Safety. Minnesota brewery owners face the same challenges many other small businesses face, including cash flow, inventory management, distribution and complicated tax regulations. Whether you are building a new brewery or expanding an existing one, the interview with Able Seedhouse and Brewery below will provide technical and business ideas to help get the job done.

Q: WHAT INSPIRED YOU TO JOIN THE BREWERY INDUSTRY?  

A: A connection to the malting component and agriculture. Beer is a great way to highlight the value of locally sourced grains. 

Q: WHAT WERE THE BIGGEST CHALLENGES WHEN OPENING ABLE SEEDHOUSE AND BREWERY?  

A: It is hard to focus on the biggest challenge because it felt like all the little challenges compounded to make the process difficult. Timing was a big issue for us. Attempting to juggle the delivery of equipment, permitting and other details required to open our doors was a challenge.

Q: WHAT ARE YOUR TOP TAX AND ACCOUNTING CONCERNS OR QUESTIONS?  

A: We are very focused on cash management at the moment to ensure we are investing in the best ways to generate the highest return on investment (ROI). Any recommendations to manage cash?

Smith Schafer’s Insight:  Many software products allow for tracking product costs as a percentage of revenue. Determine the industry benchmark for product costs and capital investments and try to align your brewery’s spending accordingly. By tracking your costs and reinvestments, you will be able to quickly determine if you are out of line with industry standards or when you will need to increase the price of your product to consumers based on your costs. 

Another concern is determining when and why we need to add resources to our accounting department to keep up with growth.

Smith Schafer’s Insight: The easiest way to determine this is to ask your current accounting department if they need help. If your department consistently gets payroll done, but is unable to finalized monthly accounting in a reasonable time period, (i.e. before the end of the next month), then it is likely your current staff could use additional support. However, this does not mean you need to hire someone full-time. Consider part-time help, or an outsourced accounting department. Smith Schafer has a designated Small Business Services team to assist many clients with their everyday accounting needs.  Click to learn more about outsourced accounting services.

Another sign you may need additional accounting help is if you are unaware of tax credits your brewery may be eligible for. Are you able to keep up with the ever-changing tax environment? If you answered no, you may need to consider adding accounting resources. You should not be tied down by spreadsheets, compliance reporting and tax research. You need a team member who minimizes your taxes through forward-thinking strategies and services. 

For example:Below are a few tax credits your accounting resource would help your brewery identify and take advantage of. 

  • The Research and Development Tax Credit
  • Work Opportunity Tax Credit
  • Tip Credit

Q: WHAT IS ABLE SEEDHOUSE AND BREWERY’S GREATEST OPPORTUNITY FOR GROWTH?  

A: Geographic expansion. 

Smith Schafer’s Insight: While geographic expansion is certainly an opportunity for growth, it brings with it additional risks and costs. Overhead costs, market saturation and other factors represent reasons why other avenues for growth may be a better option. 

  • Cooperation with another brewery across town is a good way to expand consumer base while sharing costs. This sort of joint venture may seem counterintuitive; inviting your competitor into your market may reduce your local market share, but doing so allows your brand seen by a wider range of consumers who might decide they want to try more or your products.
  • Another avenue for growth may be partnering with other local businesses, like restaurants or your local Chamber of Commerce. Creating goodwill in your community goes a long way in customer retention. 
  • Many breweries partner with food trucks to serve their hungry customers. Others work with event planners to be included as a beer vendor for community and private events.  

Q: WHAT INDUSTRY MEDIA DO YOU UTILIZE TO KEEP CURRENT ON RELATED BUSINESS TOPICS, SUCH AS PAYROLL REGULATIONS, OVERTIME OR VACATION REGULATIONS? 

A: We use a third party product, SaaS, for payroll and to help us manage HR issues. 

Smith Schafer Insight: Consider subscribing to the Minnesota Department of Revenue email updatesMNCPA newsletter or the Smith Schafer hospitality industry blog. These resources highlight timely information pertaining to the hospitality industry. Joining an industry association, such as the Minnesota Hospitality Association, will also provide an avenue to what is going on with other businesses like yours.

Q: WHAT ADVICE WOULD YOU GIVE TO SOMEONE CONSIDERING OPENING THEIR OWN BREWERY?  

A: Know who you want to be and get access to existing breweries’ financials to determine if your plan makes sense. For example, the size of brewery, where and how you will sell your beer, funding, location, profitability and cash flow, and team experience to execute.

Smith Schafer’s Insight:  We recommend meeting with two people at the start of any venture, a lawyer and an accountant. Do not wait until tax time to share with your accountant about starting a new business. Cost is often a concern with new business owners, but skipping a consultation with your tax accountant may end up costing you more in the long run.  

Breweries face a number of business issues, requiring a broad skill set to find solutions. Smith Schafer’s depth in the hospitality industry means you will always receive the advice you need. Smith Schafer has been recognized leader in providing accounting, auditing and consulting services to the hospitality industry since 1971. Our Hospitality Group is committed to serving over 100 Minnesota hospitality entities. For more information on accounting and tax strategies that may benefit your brewery, contact a Smith Schafer professional today! We look forward to speaking with you soon.  

Transportation Industry: The Budgeting and Accounting Basics You Need to Know

Transportation Industry: The Budgeting and Accounting Basics You Need to Know

Many growing transportation companies struggle to create well-tuned accounting processes, especially as systems need to change to support increased activity. We have provided the guide below to help transportation companies better understand some basic accounting procedures:

1. ACCOUNTING METHOD

There are two principal options for accounting for revenue and expenses:

  • the cash method
  • the accrual method

The cash method of accounting is exactly as it sounds – revenue is recorded when cash is received, and expenses are recorded when cash is spent. This is the simplest accounting method. However, it does not always give a complete and accurate picture of a company’s operations.

Example: A large job is completed in December 2018, but payment is not received until January 2019; expenses related to the job were paid in 2018.  Using the cash method of accounting, the revenue will be recorded when payment is received in January 2019 and expenses recorded in 2018 when paid.

Under the accrual method of accounting, revenue is recognized when it is earned, regardless of when the cash is received and expenses are accrued even if not yet paid.  The accrual method of accounting provides a more complete and accurate picture of a company’s operations and matches the expenses to the same period as the revenue.

Tip: If a third party, such as a bank or bonding company, is requiring a transportation company to have CPA-prepared financial statements, inquire about the method of accounting they prefer.

2. FUEL AND PARTS INVENTORY

Inventory is often associated with retail businesses and is generally a product to be sold to customers. However, transportation companies may also have inventory but it’s in the form of products consumed in the production of services. These may include fuel, parts and other supplies.  Under the accrual method of accounting described above, inventory is an asset to the company and is not recorded as an expense until it is used.

3. LEASING ASSETS VS. BUYING

Many factors are involved when deciding between leasing a piece of equipment or purchasing the equipment. Leasing equipment has predictable payments that are typically 100% deductible as an operating expense. Generally, companies do not pay for maintenance on leased equipment. However, companies are charged interest as a component of the lease payment.  This interest results in an overall higher cost than an outright purchase. 

When purchasing an asset the overall cost may be lower but this transaction generally requires a higher initial cash outlay at the time of purchase.  In a purchase situation, the transportation companies have complete control over the asset. 

4. TAX CONSIDERATIONS

There are two major tax considerations specific to transportation companies.

  • Meals provided to employees. The general rule is a company may deduct 50 percent of business-related meal expenses. However, transportation companies receive a higher deduction. Employers can deduct 80 percent of the cost of meals provided to employees whose work is subject to U.S. Department of Transportation hours-of-service limitations.
  • Credit for taxes paid on fuel. The government essentially taxes all fuel purchases, but then allows a credit for nontaxable uses of this fuel. Nontaxable uses include, but are not limited to, farming, off-highway business, such as refer fuel, use and transporting students. In order to claim the credit, a Form 4136 must be completed with the tax return.  A tax credit reduces income tax dollar for dollar. Whereas a tax deduction reduces your income subject to tax.  For example, a Form 4136 is completed and calculated at a $1,000 credit, income tax is reduced $1,000.

Need help managing the daily routine?

Transportation company owners manage and balance many duties including the accounting department. One strategy to reduce the burden is to hire additional staff. This strategy can be ineffective without the proper expertise, oversight and guidance. Smith Schafer offers scalable accounting services. Whether you need help managing the daily routine or assistance with more strategic decisions, such as software analysis and selection, our accounting professionals can give you back valuable time and resources so you can focus on growing your transportation company.

Contact us today to learn more about how we can help while providing accurate, timely and professional financial advice. 

Nonprofit Industry – Functional Expense Statement Tips

Nonprofit Industry – Functional Expense Statement Tips

Nonprofit organizations will need to include a breakdown of expenses by their natural expense classification and their function for years beginning after December 15, 2017. Nonprofits need to be aware of how they are spending funds and how they allocate costs between the functions under generally accepted accounting principles. Below are tips for nonprofits creating or assessing a statement of functional expenses.

  1. General and administrative (G&A) costs are not bad. In fact they are necessary, of course, like most things, they are better in moderation. When an expense does not fall into the program or fundraising bucket it is, by default, a G&A expense. A nonprofit should not hide from the need for funds to operate the organization. Having support staff (HR, accounting, administrative assistants) shows signs of a strong and growing organization.
  2. Fundraising costs are not bad. If an organization has contributions, they should have fundraising expenses. There are opportunities to allocate a portion of these costs to program or G&A expense, however, a series of tests and conditions need to be met.
  3. Create a plan to allocate costs. Ideally invoices coming into an organization would be for a specific function. In reality, many expenses need to be allocated, including rent, depreciation, salaries, and office supplies. Nonprofits need a plan to allocate these costs, for example, by a time study or square footage analysis. Ultimately, the allocation method needs to be reasonable for each item being allocated.
  4. Review and alter the plan to allocate costs. A pillar in accounting is to be consistent, but in a changing work environment, an individual’s time allocation this year may be drastically different than the prior year. As a result, the salary allocation should be reflected differently. 
  5. Executive Directors are not allocated based on the staff reporting to them. Any personal in a managerial role needs to have direct conduct or supervision of a program in order for it to be allocated to program expense. Oversight of personal in charge of the program does not reach the threshold to be included in program expenses.
  6. Categorizing all program expenses together may not be the best approach.  Nonprofits are required to report program expenses by major programs, however, organizations define what qualifies as a major program. These sub-categories of programs may change from year to year, just as they have on the 990 in the past. The same is true for support services (G&A and fundraising). They can be broken down into sub-categories if the nonprofit feels it conveys the information. 

A statement of functional expenses that accurately depicts a nonprofit and complies with generally accepted accounting principles, will take time and effort, but will add valuable perceptive on the financial statements.

Smith Schafer has helped local nonprofits throughout Minnesota grow and thrive in their communities for the past 45 years. To learn more about how we can help, please contact a Smith Schafer professional. Click here to contact us. We look forward to speaking with you soon.

Construction Company Accounting Procedures – What You Need to Know

Construction Company Accounting Procedures – What You Need to Know

Good accounting systems and practices are important tools for managing any construction business. Given the uncertainty in the construction industry, it is particularly important to monitor job performance, control costs, improve profitability and manage cash flow. To help our construction clients, prospects and others better understand the basic accounting procedures, we have provided the guide below:

REVENUE RECOGNITION

Construction accounting is different from other types of accounting because of the long-term nature of many contracts. In a typical business, revenues are recorded when they are earned and expenses are recorded when they are incurred. This generally happens at the time an exchange occurs. However, with a long-term construction contract, this may last for several months or even years, waiting until an exchange occurs. This may result in misleading financial information. In order to present an accurate reflection of the company’s finances, there are two options to recognize construction revenue and costs.

  1. Completed Contract. As the name suggests, the completed contract method does not recognize revenues or expense until a project is substantially complete.  In a simple example, a construction company enters into a $100,000 contract in June 2017. The job is expected to be completed in May 2018 at a cost of $80,000.  Using the completed contract method, the company would recognize all revenue and expense in 2018, regardless of actual costs incurred during 2017. The completed contract method is typically only used for short-term contracts or when contract costs are difficult to estimate.
  1. Percentage of Completion. Under the percentage of completion method, revenue and costs are recognized as a contract progresses toward completion.  Most construction companies, with long-term contracts, should use this method.  Using the contract example from above, assume the company has incurred and recognized $32,000 of costs as of the end of 2017, the project is considered to be 40 percent complete. Thus, the company would also recognize 40 percent of the total expected revenue, or $40,000.

These two methods are not interchangeable. Once an accounting method has been chosen, it must be applied consistently to all similar contracts.

<< To learn more, read Revenue Recognition – 5 Items Affecting the Construction Industry. >>

JOB COSTS

All construction jobs have direct and indirect costs associated with them. Direct costs include labor, subcontract expense, materials, equipment, and tools. Since these costs are directly related to a project, it is easy to allocate them. Indirect costs are those benefiting more than one job, such as insurance, supervisor wages, rent and utilities. A construction company needs a reliable method for allocating these indirect costs to the various jobs that they benefit. An accurate allocation method will lead to a more realistic representation of job costs and profitability. 

CASH FLOW MANAGEMENT

A construction company owner should always consider ways to improve cash flow when negotiating contracts, specifically retainages, payment terms and penalties for late payments. Ensure invoices and change orders are processed and sent quickly. Consider shortening payment terms with customers or offering a discount for prompt or accelerated payment. Effective cash management is essential to maintaining a construction company’s overall financial health and plays a vital role in the success of the business.

Questions?

Industry knowledge and close collaboration are instrumental in providing our construction clients with the insight and awareness to make the best business decisions and seize growth opportunities. Smith Schafer is a recognized leader in providing accounting and consulting services to the construction industry since 1971. We have a team of experts, focused on working with the construction industry, and committed to helping our clients succeed. If you have questions about improving your business model, implementing an accounting practice or tax planning strategies to improve operations, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.

Hospitality Industry: 6 Common Tax Deductions

Hospitality Industry: 6 Common Tax Deductions

Are you aware of tax deductions and credits your hospitality business may be eligible for? Many hospitality owners tend to focus on the day-to-day operations and dealing with compliance regulations. Tax related matters tend to be postponed until after the end of the year. Now is the time to plan ahead for tax deductions to maximize the tax savings in the future. Smith Schafer has provided a list of possible deductions and credits to help our hospitality clients, prospects and others be aware of possible tax savings in the hospitality industry.

1. TIP CREDIT

Hospitality businesses may be able to claim a credit for social security and Medicare taxes paid or incurred by an employer on certain employees’ tips. This credit is part of the general business credit.

You may claim this credit if you meet both of the following conditions:

  1. You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
  2. During the tax year, you paid or incurred employer social security and Medicare taxes on those tips.

Generally, the credit equals the amount of employer social security and Medicare taxes   (7.65%) paid or incurred by the employer on tips received by the employee.

2. WORK OPPORTUNITY TAX CREDIT (WOTC)

The Work Opportunity Tax Credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have historically faced barriers to employment and discrimination in the workplace. You may be able to claim this credit on first- and/or second-year wages you paid to or incurred for these employees during the tax year.

You must ask for and be issued a certification for each employee from the state workforce agency (SWA) of the state in which your hospitality business is located. The certification proves the employee is a member of a targeted group. You must either:

  1. Receive the certification by the day the individual begins work; or
  2. Complete IRS Form 8850, Pre-Screening Notice and Certification Request for the WOTC, on or before the day you offer the individual a job and receive the certification before you claim the credit.

     The new hire must fall into one of the following target groups listed below:

  • Qualified IV-A Recipient
  • Qualified Veteran
  • Ex-Felon
  • Designated Community Resident
  • Vocational Rehabilitation Referral
  • Summer Youth Employee
  • Supplemental Nutrition Assistance Program Recipient
  • Supplemental Security Income Recipient
  • Long-Term Family Assistance Recipient
  • Qualified Long-Term Unemployment Recipient

3. THE RESEARCH & DEVELOPMENT (R&D) TAX CREDIT

The R&D Tax Credit is an incentive for hospitality businesses to invest in research and development activities to increase growth and competitiveness. Businesses may be able to take credit up to 13% of eligible spending for new and improved products and processes.

Qualified research must meet the following four criteria:

  1. New or improved products, processes, or software
  2. Technological in nature
  3. Elimination of uncertainty
  4. Process of experimentation

Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.

4. 199A TAX DEDUCTION

The Tax Cuts and Jobs Act (TCJA) created a new deduction for pass-through business owners. This deduction, in certain situations, may provide up to 20% tax deduction on qualified business income for eligible partnerships, S corporations and sole proprietorships. For taxpayers with taxable income exceeding $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations.

These limitations include:

  • Whether the business is classified as a service trade or business.
  • Taxpayer’s taxable income.
  • The amount of W-2 Wages of the business.
  • Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.

<< Click to read more about how the Tax Reform impacting Hospitality Businesses >>

5. SECTION 179 EXPENSING

Beginning in 2018, hospitality businesses may deduct up to $1 million of cost of qualifying property placed in service during the given tax year. In addition, a hospitality business owner may purchase up to $2.5 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out. Limits will be indexed for inflation starting in 2019.

TCJA expanded eligible costs to encourage property improvements. The definitionof eligible property includes certain depreciable tangible personal property usedpredominantly to furnish lodging. It also includes “qualifying expenses” such as roofs, HVAC, fire alarm, and security systems for non-residential property. Costs incurred as part  of new construction cannot be expensed under the Section 179 deduction. The increase  in amount of Section 179 allowed encourages business to increase their capital expenditures budget.

6. IMMEDIATE 100% EXPENSING (BONUS DEPRECIATION)

TCJA now allows hospitality businesses to fully expense certain capital expenditures instead of depreciating them over a several year period. These expenditures, including acquisitions of used property, may be fully expensed starting with business assets placed in service after September 27, 2017. Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022. This immediate tax benefit is likely to encourage more capital spending.

Questions?

The hospitality industry has been impacted in several ways by the tax reform bill and the change in the industry. If you have questions about these changes or tax planning strategies that may benefit your hospitality business, contact a Smith Schafer professional today! We look forward to speaking with you.