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North Bay Business Journal

Monday, June 24, 2013, 6:00 am

Rise of craft beer highlights needs in accounting and tax planning

Industry shares aspects with wine, with some nuances

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    NORTH BAY — After a number of accounting and advising firms have found a focus in serving the specific needs of the North Bay wine industry, demand from a different beverage category — craft beer — is highlighting another niche for tax and bookkeeping.

    Many North Bay accounting firms with clients in both industries drew parallels between brewing and winemaking, including the heightened financial reporting requirements required as alcohol producers.

    Yet as craft beer explodes in popularity in the North Bay and beyond, the accounting and tax nuances facing an ever-growing roster of craft brewers are becoming a topic of increased interest for the region’s large and small brewers alike.

    Tom McCormick

    Tom McCormick

    “For many years, a lot of us were driving in the dark, trying to help each other. It was easier to get someone to help you with equipment and sourcing ingredients than finances,” said Tom McCormick, executive director of the industry trade group, the California Craft Brewers Association. “It’s just now beginning to develop where we’re seeing some people who are popping up to serve our industry.”

    Sonoma County craft breweries, along with distillers and cider makers, were responsible for nearly $450,000 in outside accounting,  tax preparation, bookkeeping and payroll services in 2012, according to the first-ever Sonoma County Craft Beverage report released last week by the Sonoma County Economic Development Board.

    Those breweries — currently 18 in Sonoma County alone — range widely in size. The largest in the region, Petaluma’s Lagunitas Brewing Company, produced more than 250,000 barrels of beer last year and plans to produce over 2 million after expansion both locally and within a new Chicago facility, according to the EDB. Other larger-scale producers include Cloverdale’s Bear Republic Brewing Company and Boonville’s Anderson Valley Brewing Company.

    Yet production volume drops significantly from there, with even venerable brewers like Santa Rosa’s Russian River Brewing Co. producing 12,480 barrels in 2011 — the only other North Bay craft brewery producing more than 5,000 barrels that year. And even Chico’s Sierra Nevada Brewing Company, which produces nearly 1 million barrels a year as the largest craft brewer in California, still represents only 1 percent of the production of Anheuser-Busch Inbev, Mr. McCormick said.

    Ken Dansie

    Ken Dansie

    The majority of breweries “are essentially small businesses,” said Ken Dansie, partner in the Private Company Services Group of BPM, accountants and consultants in the North Bay. Limited resources make planning for a capital-intensive expansion more difficult, even when a large demand exists.

    “When you have a small craft brewery starting to produce, the underlying capital costs just to get started are significant,” he said, noting the cost of production brewing equipment. “Going from doing your first brew underneath your stairs to selling 1,000 barrels a year are very different things.”

    The depth of planning required for an expansion puts a premium on professionals catering specifically to the craft brewing industry, though Mr. Dansie noted that the number of specialists are still relatively few in number.  And even amid surging demand, a small brewery may find those advisers out of financial reach.

    As one aspect of financial planning, the tax code has continued to evolve in respect to craft brewers in recent years. While aging beer in wooden barrels once used for wine or spirits has become a widely adopted brewing technique, those beers were until recently subject to the higher excise tax reserved for liquor in California. That changed last year, when North Coast Assemblyman Wes Chesbro’s proposal to reclassify those beverages as beer was signed into law.  

    Tami Norgrove

    Tami Norgrove

    Yet those tax issues don’t stop at California, creating another layer of complication for craft breweries distributing outside of the state and the U.S., said Tami Norgrove, chief financial officer at Bear Republic. The brewery has developed an in-house system to track those differences and other data.

    “It can be challenging,” she said, with differences that include aspects such as alcohol content and volume measurements. The brewery distributes its beer in 35 states and seven countries, and “each state has different requirements and different rules.”

    Meanwhile, other tax questions still loom at the federal level, including the question of what the federal tax code considers a “craft brewery” itself. The proposed Brewers Excise and Economic Relief Act — more commonly known as the BEER Act — is one proposal backed by large-scale producers that would drop the tax on mass-production brewers from $18 a barrel to $9, essentially raising the small brewer tax by $2. A competing Small BREW Act, short for the Small Brewer Reinvestment and Expanding Workforce Act — would lower a current federal tax of $7 per barrel for those producing less than 60,000 barrels to $3.50.

    Jim Craven

    Jim Craven

    Yet regardless of the specific tax or industry definition for craft breweries, consumers appear to be embracing them with significant brand loyalty that in many cases starts with a direct-to-consumer experience at a brewpub-type setting, said Jim Caven, a director with Pisenti & Brinker LLP. For those breweries, combining the financial reports for a restaurant and what is essentially a manufacturing operation can add another challenge.

    “Too often, we are separating our accounting info into silos,” he said. “It’s up to the accountant to empty those silos and put them together,” he said.

    One of the firm’s clients, Davis-based Sudwerk Brewing, is seeking to address those complexities by implementing a brewery-specific accounting system known as OrchestratedBEER, he said. Like similar systems developed for the wine industry and otherwise, the program allows services such as the tracking of company revenues and costs down to the ingredient level for various brews.

    The system is meant to be flexible enough for breweries of different scales and approaches.

    “We’re fortunate that there are a lot of very good breweries up here in Northern California. We can talk to each other, and learn from each other. Everyone is finding a different way to grow,” Ms. Norgrove said.

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