Like many wine professionals, Timothy Hirsch, a consulting sommelier and the project and operations manager for Grand Cru Wine Consulting in New York City, religiously documents his expenses for tax time. But, he says, his methods are fairly rudimentary. “I haven’t found a better method than just shoving every receipt into my wallet,” he says, adding that his friends often compare him to George Costanza, the Seinfeld character whose wallet exploded from too many receipts.
While keeping track of profit-and-loss statements has been straightforward enough, Hirsch says that figuring out the best way to file his taxes each year—and how to take full advantage of the deductions available to him—has been perplexing. Says Hirsch, “I literally haven’t been able to get enough time and energy together to sort it out.”
For many drinks professionals, making sense of their taxes is a far more daunting task than learning the chemistry of malolactic fermentation or the geology of volcanic soils. Even if, like Hirsch, they had a system in place previously, much of it has likely been up-ended by recent changes to the federal tax code.
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SevenFifty Daily reached out to certified public accountants (CPAs) and other tax experts to get clarity on what drinks professionals need to know as they prepare their 2018 returns. In each case, the CPAs were careful to note that everyone’s situation is different—and specific, and that tax advice needs to be tailored to an individual’s unique circumstances. But with that in mind, they offered some basic advice that drinks professionals should take into account. From overlooked deductions to drawing the line between personal and business expenses, here’s what the tax pros suggest.
Review Your Withholding Allowances
Dustin Lawler, an independent bar consultant and the bar manager at Hop Alley in Denver, Colorado, got an early jump on his taxes this year, but upon completing the paperwork, he was shocked to learn that he owed more than last year. “My wife and I had a child in 2018,” he says. “I was assuming that would impact [our taxes] for the better.”
Lawler isn’t alone. According to Corey Veneziano, a partner at blumshapiro, a New England-based accounting, tax, and advisory firm, many Americans have felt burned by changes to the tax code this year. “But,” he says, “when you peel the layers back, for some people this is more of a function of a change in withholdings versus losing deductions under tax reform.”
Veneziano explains that because the tax brackets and the standard deduction were modified—which in turn affected how many allowances people should’ve claimed on their IRS Form W-4s—many people are just now discovering that the amount of taxes they elected to withhold for 2018 ended up being insufficient, resulting in underpayment.
To avoid a situation like Lawler’s, Veneziano suggests reviewing your W-4—especially if you’ve worked for the same employer for longer than a year. Also known as the Employee’s Withholding Allowance Certificate, this form provides information to your employers about, among other things, how many allowances you want to claim when taxes are withheld from your pay. You can resubmit the form to your employer at any time throughout the year, but the change will only be effective from that date forward. For example, if you change your withholding allowances in April 2019, those allowances take effect for the remainder of the fiscal year. However, your old allowances would still apply for the months of January through March.
Understand the New Qualified Business Income Deduction
From freelance sales reps to shareholders in businesses organized as partnerships or S corporations, many people in the beverage alcohol trade can benefit from section 199a of the Qualified Business Income Deduction. This new feature of the tax code can result in a 20 percent deduction of income for pass-through businesses, including sole proprietorships, partnerships, and S corporations.
According to Erica York, a tax analyst with the non-profit tax policy research organization, the Tax Foundation in Washington, D.C., “The easiest way to think about 199a is that it’s really two deductions in one. If a person’s taxable income is below $157,500—or $315,000 for married joint filers—the deduction is quite simple. They get a 20 percent deduction of their business income and that’s it.” Those taxable income levels, she notes, include total household income, which encompasses a spouse’s income or a second job.
But, York cautions, for filers above those taxable income thresholds, it gets complicated, with “specified service tests” to determine the size of the deduction. “Independent contractors making above the income limits won’t likely get a large deduction because they probably aren’t paying out W-2 wages,” she says, adding that it’s best to work with a tax expert to understand how this benefit may apply to you.
Categorize Business Expenses Strategically
Many beverage professionals want to know what counts as a tax-deductible business expense, and, more importantly, what does not. After all, the lines between business and pleasure can be pretty thin when you travel to Europe to tour wineries or breweries—or visit Los Angeles to research the latest cocktail trends.
“One of the biggest changes with tax reform is that entertainment was deductible, and now it is no longer deductible,” says Stephen Fuller, another partner at blumshapiro. For example, if you take a client to a baseball game, that expense cannot be deducted for taxes.
Food and beverage expenses remain 50 percent deductible, but Fuller says that “where it gets fuzzy is if you are, for example, a wine expert and tasting wines is a required function of your job.” He says that it entirely depends on the facts and the nature of the expenses, but a strong case can be made that deducting wines used for research as a function of your job, for example, is legitimate. If that’s the case, don’t itemize them as food and beverage, as it will result in getting only half of the benefit.
Review Changes to the Personal Standard Deduction
The changes to the Personal Standard Deduction are significant, and should be given consideration. Under the old rule, taxpayers who did not itemize their deductions could claim a standard deduction in the amount of $6,350 for individuals, $9,350 for heads of household, and $12,700 for married couples who choose to file jointly. Those standard deductions have now almost doubled, to $12,000, $18,000, and $24,000 respectively.
From Veneziano’s perspective, the changes to the tax code didn’t simplify much, but “it did simplify the itemized deduction situation, because a lot of people are not going to be itemizing any more.”
Ultimately, the choice on whether to itemize your deductions or claim the standardized deduction is completely dependent on your own unique financial situation. But the changes are significant enough to give any beverage professional a reason to pause—and possibly re-evaluate their approach to this year’s taxes.
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Kevin Day is a wine writer and photographer based in Colorado and the founder of the wine website Opening a Bottle. He is an Italian Wine Scholar with Highest Honors and a member of the International Association of Culinary Professionals. Follow him on Instagram and Twitter @openingabottle.