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Old 04-10-2013, 01:01 AM   #1
TaxGuy
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Disclaimer - this is not meant to be accounting, tax or legal advice. Seek a qualified advisor before you make any decision regarding taxes and related items.

A homebrewer once asked me about deducting the cost of his equipment, supplies and ingredients on his tax return. His homebrewing activities generated a loss and would be used to offset some of his W-2 wage income earned from a full time job. Here were some of my thoughts during that conversation.

Generally speaking, you must engage in a trade or business before you can deduct any business expenses (IRC section 183). If your homebrewing does not constitute a trade or business or an activity engaged in for profit, deductions from related business expenses are generally limited to gross income from that business. In other words, if gross income from your brewing business is $1,000, your deductions are generally capped at $1,000.

In order to deduct expenses beyond the gross income generated by your homebrewing business, it must be an activity engaged in for profit. The courts look to a series of factors for purposes of determining whether or not an activity is engaged for profit. This is not intended to be an all-encompassing analysis of those factors, but they include items such as: 1) a history of profitability, 2) financial record keeping such as keeping a separate bank account for the activity, 3) the existence of a business plan and following through with that plan, 4) a review of profit and loss statements and changing future behavior based on that analysis, 5) successes in related ventures, 6) the existence of other means in which to finance the activity (i.e. other sources of income), and 7) the amount of personal enjoyment derived from that activity.

No single factor will establish whether or not an activity is a hobby vs. an activity engaged in for profit. A summation of all the factors (including those I didn't specifically list) will be taken into consideration when determining whether an activity is an activity engaged in for profit or a hobby.

Keep in mind that this does not mean that your brewing activities must be incorporated under State Law, or in the form of a Limited Liability Company, etc. in order to be an activity engaged in for profit. An activity engaged in for profit can be a sole proprietorship which is generally reported on Schedule C of Form 1040.

The challenge most homebrewers face is a lack of gross income. It is very hard to treat any activity that does not generate any income as an activity engaged in for profit. Most homebrewers do not have a brewing license and may not legally sell their beer. However, given the recent boom in homebrewing, it is possible that homebrewers could generate income from providing homebrewing educating, consulting and related personal services. This is a potential source of gross income, and depending on the facts and circumstances of this advising could constitute an activity engaged in for profit.

In summary, a homebrewer must consider many factors such as those listed above before concluding whether their homebrewing activities (i.e. consulting, educating, advising, etc.) rise to the threshold of a trade or business, or if it is simply a hobby. If it is anything less than an activity engaged in for profit, your deductions are generally limited to the gross income generated by that hobby.

EDITED TO ADD: I am only talking about a trade or business such as consulting, education and related services where permitted under local law. I am not suggesting that anyone illegally sell homebrew. That will get you into trouble.

To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in or accompanying this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.

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Old 04-10-2013, 01:12 AM   #2
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I think you'd be very hard pressed to convince an IRS auditor or Tax Court (or District Court) judge that it is a business engaged in for profit if you do not have the requisite licenses to carry on that business.
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Old 04-10-2013, 01:20 AM   #3
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If you do not have a business license to produce, sell or distribute beer, you will not be able to create a homebrewing business based solely on what you produce, distribute or sell.

However, do you need a license in order to provide educational, consulting or advisory services relating to homebrewing? While that depends on state and local law, but I would generally say these activities do not require a license.

 
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Old 04-10-2013, 01:22 AM   #4
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anyone speak Greek? I have no idea what the flocc they're talking about. I got lost after the disclaimer.
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Old 04-10-2013, 01:23 AM   #5
Demon
 
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Homebrewing by definition cannot generate income, which provides no prospect of profit, therefore nothing is deductible.

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Old 04-10-2013, 01:32 AM   #6
TaxGuy
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Quote:
Originally Posted by Demon View Post
Homebrewing by definition cannot generate income, which provides no prospect of profit, therefore nothing is deductible.
I would agree with this statement to the extent you are referring to producing, distributing or selling beer that you have produced. Since it is generally illegal to sell homebrew without the proper business licenses, etc., there is no prospect of profit.

However, an experienced homebrewer could certainly achieve profits by establishing a successful homebrew consulting business.

 
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Old 04-10-2013, 01:34 AM   #7
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Quote:
Originally Posted by TaxGuy
If you do not have a business license to produce, sell or distribute beer, you will not be able to create a homebrewing business based solely on what you produce, distribute or sell.

However, do you need a license in order to provide educational, consulting or advisory services relating to homebrewing? While that depends on state and local law, but I would generally say these activities do not require a license.
Equipment is in your house? You use it to brew your own beer?

If you're not turning a profit, I think you are in for serious scrutiny by a field auditor and unlikely to convince an Appeals Officer. I'm not saying it cannot work but you better be ready to go the distance with it ($) and be prepared to accept the draconian penalties in the likely event that you lose.
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Old 04-10-2013, 01:38 AM   #8
Randy_Bugger
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How many years can I depreciate my brew kettle?

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Old 04-10-2013, 01:41 AM   #9
tgmartin000
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Red flag. Would not proceed.

I deduct expenses from playing in a band, but I also get W-2'ed sometimes, so I figure that's gotta be acceptable. Of course, part of the expense of being in a band is.......beer! Hobbies are not deducible. OF course, I'm not an accountant, so I don't know sheet.

 
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Old 04-10-2013, 01:41 AM   #10
tphjr
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Quote:
Originally Posted by Randy_Bugger View Post
How many years can I depreciate my brew kettle?
Is it used as part of a business? If no then you can't.

 
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