Homebrew and Taxes

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CollinsBrew

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As I did my taxes this year and had to actually pay out rather than receive a refund for the first time in my life, a light bulb went off when I saw what you could itemize as deductions. Apparently, a hobby that is done in the likeness of a business can be used as an itemized deduction on taxes. When I saw this, the wheels started turning.

This is the hypothetic situation that came to mind and you tell me if you think that it holds some water:

We all know that you can't sell your homebrew without some sort of beer/liquor license, dependent on your state of residence. We also know that per adult in the household 100 gallons of beer can be made up to 200 gallons per year. However, what if you were not selling the beer but selling the recipes? You could obtain a business license (or incorporate) for a developmental or logistical business that specializes in the development of beer recipes for sale or for the purpose of writing a beer recipe cookbook of sorts. This could then make all of your homebrewing expenses deductible at the end of the year (equipment, ingredients, home office, brewing space etc.). Not only that but, you could potentially claim a loss for a number years in the event your business is not profitable. I don't see a legal issue here as long as you are legitimately trying to market your recipes in some fashion. The beer made is just a bi-product of your research, must be consumed and the spent grains can be recycled thus making you an environmentally safe company, which could reap more tax benefits for you.


I mentioned the hobby deduction before because that is what got this idea spinning. For a hobby to count it must operate as a business. The example given was a small farm that makes money...let's say $7500 in a year. That must be added to your income for the year. However, the expenses of that farm amount to about $7900 for the year. If this were a business, you could deduct all of those expenses and also claim $400 for a loss in simple terms. Since this is a hobby though, you can only deduct in expenses what you made thus canceling itself out and not benefiting you tax-wise. Basically, is was explained to me that a business claiming a loss for more than the set number of years a business can claim losses will then be deemed a hobby by your friendly IRS.

Anyway, do you guys think this is at all feasible? I already keep a careful watch over what I spend on brewing supplies and materials anyway.
 

brewt00l

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problem 1: Hobby losses are deductible only to the extent of profits from that same activity, they can not be used to off-set other profits.

edit...leeme expand:

"Basically, is was explained to me that a business claiming a loss for more than the set number of years a business can claim losses will then be deemed a hobby by your friendly IRS." sorta kinda. A quick trip to www.irs.gov can clear a lot of your confusion up.

Your hobby doesn't not have to be run like a business. Keep in mind the hobby loss provision was intended to allow relief for people who earn incidental income from a hobby they are engaged in; to allow them to "zero" out the income by using offsetting expenses generated by that hobby.

What you want is to have your homebrewing hobby declared a for-profit business to deduct your losses. The issue there is that you have to run it like a for-profit business and that would require legal compliance $$ and all sorts of headache. Right back where you started.

Just get it over with and commit tax fraud, drink a homebrew while you do it if you must to get the beer-taxes connection going. ;)
 

EdWort

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Any tax savings for me would not weigh against the audit red flags it would cause. Time wasted in an audit would eat up any savings for years.
 
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CollinsBrew

CollinsBrew

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That's what your friendly CPA is for....you know, that one you were friends with in high school. They know all of the rules and can give "helpful" hints.

Operating a sole proprietorship basic business really isn't all that difficult. Yes, there is a bit more paperwork to fill out in the end but play it right and legal and it could greatly benefit you. You could even deduct the expenses for having a Super Bowl party by calling it a recipe tasting event...the possibilities are endless.

I hear what you're saying about being deemed a for-profit hobby but you actually have to turn profit something like 3 out of 5 years to call it that. If you don't, all losses claimed for that period can be retroactively charged to you next time around.
 

ohiobrewtus

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Involving alcohol in your tax return is not a good idea IMO, regardless of what you may be able to gain from it. The potential attention from other government areas is probably not something that you want.
 

Finn

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Yeah ... ya gotta talk to a tax wonk about this. I'd hate to have you get the idea from listening to a bunch of half-sozzled mopes like me that this would be a fabulous money-saving opportunity, and then be looking at your mugshot on the front page of the paper by a picture of "The Man" driving a tank through your back fence.
 

Matt Foley

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Here is my thought.

I had a good friend who was a film buff. He would see almost every movie that came out. As you can see, ticket prices add up. So . . . what if he were to start a blog as a movie critic doing a write up on every movie he sees. He sells advertising and google ads on his blog (i.e. legitimate business?) Perhaps he gets away with deducting the costs of movie tickets over and above his advertising revenue.

So . . . you start a homebrewing blog dedicated to developing recipes. You offer recipes on your blog and you sell advertising including google ads. Legitimate business?

I guess it depends on how aggressive you want to be, but it sounds like you might get close.
 

brewt00l

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CollinsBrew said:
I hear what you're saying about being deemed a for-profit hobby but you actually have to turn profit something like 3 out of 5 years to call it that. If you don't, all losses claimed for that period can be retroactively charged to you next time around.
You're one or the other..hobby (no profit motive) or business (profit motivated).


Rather than make wild assumptions that will wind up costing you in the end, go read up at the source:

http://www.irs.gov/newsroom/article/0,,id=169490,00.html
http://www.irs.gov/pub/irs-pdf/p535.pdf
 
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CollinsBrew

CollinsBrew

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My point was, the hobby deduction got me thinking about how I could turn my fun, rather expensive hobby into a simple business that could benefit me in any way.
 

sirsloop

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I have a photography business that I run on the side. At the end of the year I do a schedule-c and deduct things like 1/7th of my apartment, mileage on my car, photography equipment and computer hardware purchases, food while working, advertising costs, etc etc. This is perfectly legit, I have the business registered with NJ, fully insured, etc. What you are proposing is far far more on the shady side. If you do it the right way I can see how it could be legit. If you actually make a book with your recipes in there I think it would fly. You could write off all equipment purchases, square footage of your "brewey", utilities (gas electric). You will have to check and see if consumables for beer is able to be written off. Thats what you are really after and I recommend talking to a CPA about it. The tricky part is that most of this stuff cannot be written off if its ever used for non-business. Yeah I use my camera for non-buisness but I can say its for my portfolio. Yeah you'll brew for yourself, but you can say that you were developing a new recipe. Thats the tricky part and the addition of alcohol can be a red flag. It doesn't cost a lot to make a book (maybe like 2-3 copies)... and the savings in taxes would easily offset it. If you do get audited, you're gonna at least want a product that you are "trying" to get published. Heck, who knows... if it turns out to be a good book maybe you'll actually make money on it!!!!
 

Donasay

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I don't know how advanced of a brewer you are, but lets say you decide to start teaching courses in home brewing at a local community college or through some adult education center. Then your home brewing equipment and ingredients would all probaby be deductable as a job expense...
 

brewt00l

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CollinsBrew said:
My point was, the hobby deduction got me thinking about how I could turn my fun, rather expensive hobby into a simple business that could benefit me in any way.
I dig that but my point is that looking for that benefit strictly in the form of a tax deduction is not on favorable side of the risk/reward equation.
 

Bobby_M

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I think your time would be far better spent figuring out how to take your interest in brewing into a profitable business, THEN worry about how to maximize your deductions. One of the best ways to convince the IRS that you're trying to make a business work, is to actually do it so it's not a lie. Incorporate or register the biz with the state, get your tax ID, actually sell something.
 

sirsloop

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well... I did that with my photog biz, but I always had that schedule C in mind when doing things ;) ;)

I think I'm a lot less likely to get audited out of other schedule-c filers because all of my income is reported via 1099-misc. Most companies have some cash amount that they enter, and its probably been skimmed a little. Its in the IRS's best interest if they double check your numbers.. but in my case its all been reported by a 3rd party.
 
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CollinsBrew

CollinsBrew

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What happens if you start a business that sells glassware...or koozies? When someone buys a glass, they get it full of beer or if they buy a koozy it comes with a bottle that happens to be full of beer. I mean, you're not selling beer, you're selling glasses....or koozies.

Don't get me wrong, I would love to make money from making beer someday and am daily thinking of a way to make that into a profitable business. Factually, I have several friends/business associates that have been talking about owning and operating their own bar. My suggestion is, why not make it a brew pub and offer a simple menu...guess what? They love the idea.
 

sirsloop

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thats shady too... if that were the case all the breweries would just "sell aluminum cans" that happened to have alcohol in them. Thats like selling "paper" that has tobacco in it. Aint gonna fly.
 
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