Startup To Scale

101. Accounting and Taxes for CPG Brands

March 22, 2023 Foodbevy Season 1 Episode 101
101. Accounting and Taxes for CPG Brands
Startup To Scale
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Startup To Scale
101. Accounting and Taxes for CPG Brands
Mar 22, 2023 Season 1 Episode 101

Tax season is here, and for businesses, most of our taxes are due very soon. Do you have any questions as you prepare to file? Whether you work with an accountant or file taxes yourself, this episode is for you. I put together a panel of finance experts to discuss common accounting mistakes. We discuss:

  • The biggest accounting mistakes CPG brands make.
  • The R&D Tax Credit and how it applies to CPG Brands.
  • When to hire a salaried employee vs. an independent contractor.


Eric Sonsino, CPA - myPocketCFO

Jarrett Warner, CPA - Sensiba San Filippo

Austen Legler - TaxTaker

Startup to Scale is a podcast by Foodbevy, an online community to connect emerging food, beverage, and CPG founders to great resources and partners to grow their business. Visit us at to learn about becoming a member or an industry partner today.

Show Notes Transcript

Tax season is here, and for businesses, most of our taxes are due very soon. Do you have any questions as you prepare to file? Whether you work with an accountant or file taxes yourself, this episode is for you. I put together a panel of finance experts to discuss common accounting mistakes. We discuss:

  • The biggest accounting mistakes CPG brands make.
  • The R&D Tax Credit and how it applies to CPG Brands.
  • When to hire a salaried employee vs. an independent contractor.


Eric Sonsino, CPA - myPocketCFO

Jarrett Warner, CPA - Sensiba San Filippo

Austen Legler - TaxTaker

Startup to Scale is a podcast by Foodbevy, an online community to connect emerging food, beverage, and CPG founders to great resources and partners to grow their business. Visit us at to learn about becoming a member or an industry partner today.

myPocketCFO (99)

[00:00:00] Hey everyone, and welcome to today's conversation where we're going to be talking everything. Taxed with a couple of our friends here to get some of your questions answered. For today's conversation, I would like to welcome in our guests and having do a quick introduction to themselves, and then we'll jump into some topics that we got in advance for the session.

So let's start it. Eric, can you do a quick introduction of yourself? Absolutely. So yeah, happy to be here. My name is Eric Sonsino. I am a CPA and co-founder at myPocketCFO. I've been working in corporate accounting as a controller for small companies, less than 20 million in revenue up to large multinationals.

But I really enjoy helping folks. Get their accounting, get their bookkeeping in order so that their financial statements accurately reflect the health of their business. And also just helping folks understand and tell their their financial story. So that's a bit of my background in a [00:01:00] nutshell.

I do consider myself in essence an accounting kind of general practitioner. You know, kind of like your doctor who's your primary care physician. But when there's a tax specific question or a technical, you know, tax issue, you know, that's when I call in the experts like Jarrett who's also on the call on the phone.

Excellent. Welcome. And then Jarrett, I'd love for you to give a quick tradition of yourself. Yeah. Thank you. I'm glad to be here. I'm, or my name's Jarrett Warner. I'm a tax partner with San Filippo. My background is primarily in or working with manufacturers and distributors and then the owners of those businesses.

And a lot of the times my companies that I'm working with, Past through entities, so you, you're s-corp partnerships that structure. But I do work with C-Corp as well, but in the smaller business, it's common to have a pass through, flow through type entity. And so like, like I said, my background's primarily manufacturing dis distribution.

And that's, I guess , that's where I'm at. I've been doing this for about 17 years now. With enjoying my time with [00:02:00] San Filippo, so we're ready to go. Who's up next? . That's great. I appreciate it. And then Austen, do you want to give a quick overview of the work that you do? Yeah. Appreciate that, Jordan.

So yeah, I'm Austen. I'm head of partnerships for a company called Tax Taker, and essentially what we do is help startups and other technology companies and innovative companies secure government tax incentives. . So we work with folks like Jarrett and Eric. You know, we're kind of a member of the special teams.

We come in and, and you know, focus on kind of this one very specific portion of, of a company's accounting and do it very well. And then kind of leave it up to, to. You know, the folks like Jarrett to really to be the quarterback and stuff like that. So exciting stuff. You know, we are able to save companies lots and lots of money every year.

And these incentives are, you know, a available you know, it's, it's, a lot of companies are unaware that these incentives are available to them. So excited to kind of talk more about that a a little later. Excellent. That sounds great. And we have a couple audience participants as [00:03:00] well who will be listening and have some questions for us later also, so to.

Kick us off. You know, I think we're coming up into tax season very soon. We're kind of in the thick of it. And there's a lot of, a lot of issues that founders and people in the food and beverage industry are dealing with. So, Eric, I'd love to kick off with you to understand whether the common kinda issues or mistakes that typically come up during this period.

Yeah. So, you know, one of the things obviously , you know, you should be aware of as a small business owner is making sure that you file your taxes. You know tax season , we're in the heart of tax season. I'm sure that you know, folks like Jarrett are very, very busy right now with the April four April 15th deadline coming up.

But you want to get ahead and just you know, reach out to your tax preparer at early. That's something that will make a big difference in order to just make sure that you get your taxes filed, even if you have to file an extension you know, your tax preparer can help with that as well.

So just, you know, getting on your tax preparers radar [00:04:00] getting in there, getting your, you know, your books in order. That also helps for, you know, the bookkeeping standpoint. Making sure that, you know, you're ready to go you know, at the beginning of the calendar year with all of your financials in order so that you can just kind of kick things off and get going for tax preparation.

Excellent. No, I think that's really good. And then Jarett, what about you? Are there some of the mistakes that you see in CPG brands making. Yeah, I think, well to Austen's point not realizing what credits and incentives that they may qualify for. So there's, you know, a lot of times the food manufacturers don't necessarily know that they might qualify for an r and d tax credit or a work opportunity tax credit credit based on their employee base.

Looking at one of the big things during the last couple years is the employee retention tax credit and trying to identify and make. or identify whether or not you do qualify for that credit. Cause there's a number of different ways that you can qualify if you're in a restaurant business or a business where tips are received.

[00:05:00] So tips credit. So if you own your own building po, potentially a solar credit, if you put solar panels on. So identifying what types of credits you may benefit from. Another thing that we see is a lot of over capitalization. You don't, you can have a fixed asset policy for your book purposes of $2,500.

So a lot of companies actually have a, a policy much lower than that, so they can actually increase that to a $2,500 policy and allow a lot more expenses to go through. But it, a lot of the times it does depend on the business and whether or not it makes business sense to do. But that's something else that we see quite a bit of.

 One of the biggest things now with some of the new state tax laws is ensuring that you're filing in all the appropriate states that you need to be filing in. And a lot of that's changed now to a customer based filing requirement rather than just where you have employees or you have inventory.

You, you may be required based on where you have customers. . And along with that goes your sales tax filing requirements and any [00:06:00] kind of gross receipts, filings that you might have that you wouldn't necessarily be thinking of. There's a number of different things to kind of look into.

But I think another thing or another item that we see quite a bit of is international tax exposure to the extent that people are subject to international taxes or we're having international presence. So we do see that coming up quite a bit where you don't realize that you actually do have a filing requirement.

In the US to report your international activities, but in addition to what you're doing internationally, you may be needing the file there. And then Jarett are any, I'm just trying to thinking through too, is like there, so most of our listeners are probably gonna be under $5 million. Kevin sales, you know, grocery, food and food and Bev.

Are there any specific. Issues that you see founders run into? I know one thing that I see a lot, and frankly, you know we were learning through with my business is accounting for cost of goods sold incorrectly and reporting it as the p and l instead of recording things as it's assets before they're sold.

Is that something that you see a lot of too? We do. So, and that's a [00:07:00] good point. Interesting point actually, because the tax Cuts and Jobs Act Act actually allows businesses under it's probably 26 million now in revenue over the last three years, that average gross receipts to go ahead and do that where you're not carrying the inventory, you can expense your inventory as it cost to get.

but you'd have to do a change in accounting method to do that if you were previously capitalizing the inventory and carrying it on the balance sheet. Generally business owners would like to track and know how much inventory they have on hand and understand their costs so that they make sure that they're charging sufficiently , to have a profit.

And especially with inflation the way it is now, you want to be able to really stay on top of your costs. But now as a 5 million revenue company, you're, you have the capability of expanding your revenue. Currently if you want to do that and, and you make that election to do, . So it's actually an, an option to be able to expense your, your inventory [00:08:00] as it costs currently when it's incurred.

Well, that's definitely good to know too. Have either of you or any of you seen issues with CPG brands working with. Like a tax accountant who doesn't specifically work with in the food and beverage industry or, or kind of growing businesses. A lot of times I've seen founders work with like, oh, they do like my family's personal taxes and then we'll help 'em do our business taxes.

Where are the kind of mistakes or missed opportunities do you see there?

I would go back to on the, go ahead Jar. Go ahead Jar. Yeah, sorry. . I would kinda go back to, to the different types of credits that they may qualify for. And not having a full understanding of who qualifies for, for what. Like, like the research and development tax credit. A lot of people think that that's gotta be in a more scientific.

Type of field rather than a food manufacturer. So there's a lot of opportunity there to qualify. And it, some of it's around like the different payroll requirements, so S-corp if you're a 2% shareholder, your [00:09:00] health insurance needs to be included in your wages and then deducted on your personal returns that gets missed quite a bit.

Partnerships, the partners aren't supposed to be. a w2, they shouldn't be paid wages. They're paid as distributions and subject to self-employment tax. So things like that we see quite a bit when we take on some of some new clients that are coming from a one person CPA shop.

That's not to say that there aren't, there's definitely very good one person CPAs out there as well. But sometimes that's, that's what we see as being. and Austen, you work with lot of the fees tax credits. What are some of the questions that you see come up during, during this time? Yeah, I think one of the biggest ones we get is, well, what if I'm not profitable?

If I'm not, you know, if I'm operating in huge losses, can I still benefit from these tax credits? And Jarett alluded to the, the r and d tax credit, which is kind of the one we focus on the most and the answer. You can absolutely take advantage of especially the r and d credit, if [00:10:00] you are pre revenue.

The great thing about it is you can use it against payroll taxes. So if you're a company that's less than five years old and you have less than 5 million in gross receipts, you can elect to use the r and d credit as a dollar for dollar offset against. Payroll taxes, you know that 6.2% FICA tax that you, that each and every employer has to pay in in the country.

So this is just such a good way to kind of just reduce that operating cost. And one of the other good things about it is you can take advantage of it every year, such as that you're continuing to invest in your product to make improve. To your product. So that's one a very often misconception about some of these tax credits.

So I just can't use them , if I'm pre-review. and Nelson, let's dive into that r and d tax credit. What is it, what qualifies for, in looking at kind of packaged food and beverage brands, what are the things that typically would qualify for tax credits? Yeah. [00:11:00] So to no fault of their own, so many food and beverage manufacturing and C P G companies, they're just unaware that they're eligible for these government-sponsored tax incentives, especially the r and d credit.

And they can actually save tens of thousands or. every year , for their investment in product development, you know, for activities that they're already performing. So, you know, you can ask yourself has your company created a new product line extensions recently? Have you modified product formulations or manufacturing processes to create products that might taste better or be more nutritious?

Have better consistency or have longer shelf lives. Have you improved existing production processes to improve efficiency? You know, if the answer is yes to any of these and more then there's a strong chance that you'd benefit from the r d tax credit study. You know, even something like functional packaging improvements can qualify.

You know, that's one that often gets missed. And then as far as as what it comes down to, it's gonna come down to what your qualified expense. Look like. And for a C P G company that's [00:12:00] typically under three buckets. So it's W2 salaries for anyone involved in the r and d process. So folks like scientists or nutritionists or dieticians and technologists, anybody that's informing product development or r and d.

And then in addition to that any 10 99 contractor expenses for anyone involved in the r and. Process, you don't get quite as much you know, bang for your buck on contractors, you get about 65 cents on the dollar, but they certainly impact the credit. The credit is primarily wage driven, W2 wage driven but, you know, contractor expenses also can qualify, like I mentioned, and supply costs used for prototyping is another one.

So you can kind of combine all those, you know, those three buckets of expenses. And yeah, that's how we kind of calculate. how we base your r and d credit on. And I think that's good. And then one kinda quick thing, I think just to, . Can I give you examples? And I know it's gonna vary a little bit just based on the situation, but with my previous m t squares, we did say a test manufacturing rung with the contract manufacturer and it [00:13:00] cost us about $10,000 for the time to do it.

And the idea was to use that time to dial in the process to see if they could manufacture it. And that was a cost that we paid to them upfront. It was, it kind of went. , I guess like con their contract at time. Then we also had ingredient costs that went into that test run. Mm-hmm. and the founder's time, you know, my time in the partner's time and being there on site for, you know, eight hours for the day, would those expenses qualify or which ones, or which ones wouldn't?

Yeah, absolutely. The short answer is yes, almost all of those expenses would qualify. The only, you know, kind of time that we wouldn't wanna qualify for someone who's a W2 employee or maybe they're a contractor, is just things they've kind of like administrative things like hiring and firing or things like that.

But anything related to product development, if you're informing product development in any way then yes, those expenses can absolutely. Qualify. Okay, perfect. , even to add on to that, and also correct me if I'm wrong, I think it also [00:14:00] includes like if the owner, the founder is kind of managing and you know, has oversight, that time towards managing an oversight of.

You know, manufacturing process also counts even if they're not like hands on, you know, doing it themselves. That's absolutely correct. And the good thing about it is the i r s actually allows for reasonable percentages of time so you can estimate what your time might have, you know, your allocate your time, how much of that was spent towards r and d.

And if you estimate that is 50% or 40, And that sounds reasonable, and then you have some documentation to back that up, then that's completely fine. It doesn't have to be an exact percentage. You don't have to back into that and make you know, crazy calculations to back into that. It just has to be reasonable.

No, that's awesome. Okay, perfect. I know there's a ton we can dive into deeper there. But I think that's something that brands should definitely consider and reach out to and really see what they qualify for. I think the one thing I found is most brands assume that they don't qualify and so they don't go through the process.

But I always recommend that founders Try and see what they do qualify for, because it can [00:15:00] also go back a couple years. So it's not necessarily just this year's activities, but I think how many years can it go back? Awesome. Like it's three years. Yeah. Three years. Statute limitation. Unless you go back three years.

Perfect. I think that's great. Yeah. So switching issues three years federally, and then if you're in California and you're doing the work or the r and d work in California, then you can go back four years for California purpose. Yeah, there's also lots of state level. Some states have amazing r and d credit programs.

So you could be eligible for state level credits as well. That's awesome. Switching gears a little bit, I know one question that I hear founders ask about a lot are, when do I hire a full-time employee and when do I kind of go with a contractor and then some of the implications of that. Eric, do you have any thoughts on that?

I mean, listen, I mean the hiring and, you know, the growth you know, path is, you know, it's different for every, every founder, every, every person. And, but, you know, some of the important considerations to make are definitely [00:16:00] from a tax perspective you know, whether they're a 10 99 contractor and you're paying them not as an employee or a w.

Employee and, you know, you process payroll. You get together with a payroll processing company and make sure that you're, you know, abiding by all the different payroll regulations. You know, for 10 99 contractors you know, a lot of questions always come up on, you know, what's my responsibility?

What do I do? What's my responsibility from a tax perspective? Cuz listen, as a small business owner, you're paying people for various services. You're paying for a photographer to take professional photos of your product, a marketing professional to manage your Facebook and TikTok ads, et cetera.

And so ultimately the i r s, you know dictates that you would issue a 10 99 to any non incorporated contractor providing service if you pay them more than $600 in a calendar. And so a copy of that 10 99 form goes to the government and it also goes to the contractor.

And that 10 99 indicates , the company's name that you're paying their legal entity name, the dollar amount that you're paying them, and their either social security number, their e i n depending on [00:17:00] how they're registered as as a. And then Eric, when do you need to pay th for these service providers?

Like if you're paying a company that's maybe like a SCOR or C cor or like an L L C, like when do you need to issue 10 90 nines to them? Versus not. Yeah, so 10 90 nines should be issued for in essence non incorporated businesses. So if they're like, you know, in individuals so proprietors partnerships et cetera.

Now, your question may be, you know, well, how do I know how do I know if the businesses, you know, how they're incorporate. So that kind of takes a step back then to the W nine. So I always encourage our customers is when you engage with a new service provider you send them a blank W nine form and ask them to fill out a W nine.

And that shouldn't be a surprise. That should be expected. And that is the form that you would hand to them. They would fill it out, send it back to you, and that is what they would fill out for what their company name is. Their legal entity. There's a box that's checked on the. As well as their [00:18:00] social security number or their e i n.

So that, you know, you get that upfront from your vendor, from your contractor, and then throughout the year they're doing work from you. You're paying them. And at the end of the year it's ultimately your responsibility as a business owner to calculate the total amounts that you've paid them.

And then issuing 10 99 s. The 10 99. If, if you have a tax preparer, they can usually help out with that. There's online services that can help out with that as well. But that is an important aspect is just capturing that 10 99 or capturing the W nine form from your from your service provider.

And just what I've seen as well is it's best to get those upfront before you start working with someone then to Absolutely. And think like, oh, it'll probably be under 600 bucks. And then it goes over and then they end up like being delayed or not wanting to send you the information. That's right. And so, and we usually, We usually have that.

I mean, when we engage with vendors and contractors, we have a standard, you know, agreement or sometimes our contractor has an agreement, but we always attach a blank W nine to the [00:19:00] back, that agreement so that it's very clear that it's just another piece of paperwork that everyone, you know, fills out and signs.

And from this perspective, it's, you know, you're a vendor your co. Service provider , would be the one to fill out that W nine , and send it back to you. So it's a lot easier just to get it upfront at the beginning when you start to engage rather than, you know, after the year ends and you realize, oh yeah, I have to send them a a a 10 99 and you never got the W nine, so you don't know their social security number.

It's a lot harder to do after the fact if you're, if you're withholding payment for service until you get that W nine. Right. You're. Power seat then because they wanna get paid obviously. I think one of the important things is distinguishing what is an employee versus what's a contractor.

And I think early on when you first start business, , you might be treating a lot of people as contractors rather than employees. And so that line can get blurry and you can end up getting in some pretty, you know, penalty wise trouble with the irs if you're continuing to treat people that are technically [00:20:00] employees as contractors because they're that.

you're not submitting the payroll taxes that you need to be potentially not providing the insurance that you should be if they're actually employees. So , there's risk there. And usually the distinguishment is whether or not that contractor is working with multiple different businesses.

Are they, do they have multiple streams of revenue coming in? If they have a set office at your place of. , their name might be on the door. If you're kind of controlling their hours and telling them what work to do and how to do the work, they're probably an employee at that point. But if you're giving them a project, they work on it and then they give you a deliverable, you're not necessarily in control of when they're working, how they're doing it then they're probably a contractor.

And typically if they're, you're paying to an e i n rather than a social security number, that's a little bit lower risk as well. So if they've got an LLC set up or or even, I mean a corporation, but you're not gonna 10 99 the corporation at least, but that is gonna lower the risk some, so that's something to consider I think [00:21:00] as you're looking at these things.

That's a great consideration. Yeah. So if anyone's, if anyone's curious, just go online and Google co-employment. There's some, a lot of interesting legal cases out there about you know, situations where there have been lawsuits for co-employment, which is in essence, you know, an employer paying someone as a contractor.

But treating them like an. And you know, if the employer loses that case, , they could be subject back for, you know yeah. Benefits, taxes, employee related taxes, et cetera. So, yeah, there that, that's a great great point to bring up. , I see a lot of times that founders might not have the best accounting and bookkeeping practices throughout the year and kind of just dump everything on their their c p A for tax time.

Are there, I mean, I think best practices are to have a bookkeeper be doing ongoing accounting. Do you have any suggestions on, you know, do you use the same person to do your taxes for your accounting and bookkeeping? Is that typically someone different? Or any mistakes? That be Eric or Jar? I can start.

I think, in our firm, it's typically [00:22:00] different. We have a separate department that does some bookkeeping, but a lot of the times , it's either done internally or the client has a separate bookkeeper that they're working with. Generally we like to see it on a monthly basis so that, you know, that's gonna help with doing some of the planning that needs to happen both from a business perspective as well as from a tax perspective to be able to plan for the future and cash flow.

And so that's typically what we see. And usually best practice would be to maintain it on a monthly basis so that you can do that. . Yeah. And there, I mean, there are folks out there CPAs that do bookkeeping and do taxes. Some do one not the other. I mean, the way I like to think about the accounting profession, the CPA profession, , it's not all, not all that different conceptually than, you know, doctors and lawyers.

You know, if you have you know, if you need surgery, you wouldn't go to your children's pediatrician, you know, if you know, need a patent or A trademark. You wouldn't go to a lawyer who practices family. . And accounting is similar. I mean, there are some folks who are tax experts and they do taxes, and there are some [00:23:00] CPAs who do bookkeeping and some do both.

And so, I mean, really, you know, you wanna make sure, what I always recommend to our customers is that, you know, you're working with folks who. Understand your business, the kind of industry that you operate in. And also just you know, have that expertise both from a tax perspective and a bookkeeping perspective.

You know, I see some folks that come to us. That you know, have had bookkeeping done by someone who just didn't have experience in that industry. And I can look at their financial statements and say, eh, these just, they don't look right. And other folks who come to us and say, oh, well we haven't filed taxes in, you know, a couple of years.

I say, okay, well we need to find you know, someone to help you with your taxes. So you know that it is just important to make sure that you're working with folks who are, you know, specializing experts in your industry. And it could be, like I said, the same individual but in, in many cases it's different.

You have either you might be doing the bookkeeping yourself and have someone doing your taxes or you might have a bookkeeper and someone else doing your tax preparation.[00:24:00] , there's some CPAs that will take a stance of saying like, Hey, let's minimize the amount of taxes that you owe, and try to do a bunch of things to really minimize that amount.

And then there are others you say like, Hey, the business is kind of what it is. Like you pay the taxes and it's the sign that you're doing well, it's a business. Do you have any suggestions or things that you've seen from your.

I would say that as long as you're not doing anything that's against the law, then that's probably okay to be doing that type of planning. If you're kind of shifting expenses around from year to year or something like that, then I wouldn't recommend doing that or taking that advice. . I think from a CPA perspective, it's more you wanna make sure that you're not doing anything that could potentially get your clients in trouble or get yourself in trouble.

Which means that you're gonna be following the tax law and not doing anything that would put either your client or yourself at risk. To that extent though, there's certain planning things that you could be doing if you have equipment that you need to purchase and maybe you don't necessarily need it until [00:25:00] January of the following year.

Maybe you buy it in December, you put it in service, and you go ahead and get that depreciation in the current year. Rather than waiting until the following The last few years we've had a hundred percent bonus depreciation. So you could deduct that full amount of that purchase in that year that you placed it in service.

So rather than waiting until 2023, you put it in service in December, 2022, and you get that full expense into 2022 rather than 23, and you've reduced your 22 tax liability by doing that. There's nothing illegal about doing that. It's just, you know, it's kind of timing when you're making your purchases.

So there's definitely ways to plan. But you wanna make sure that you're doing it within the law. Yeah, there are lots of tax strategies out there, right? To make sure you know that are, you know, potentially in the best interest of your business that may, you know, minimize or reduce your tax liability.

And you are absolutely within your rights to you. To implement tax strategies that reduce your tax [00:26:00] liability. So it's always good to be kind of in line with your tax preparer. And as Jarett mentioned, you know, if you know, doing your financials on a monthly basis and, you know, being able to, provide that to your tax preparer or even have conversations with your tax to, you know, if you're going to be doing something buying a manufacturing plant or, you know, doing something big with your business.

There are tax planning strategies that may help you with your decision making on the best way to construct a transaction or when to do it, et cetera. So it's always a good thing to be kind of in on the same page with your tax repair. And then, you know, your tax preparer would give you the guidance to help you with your tax planning strategies in accordance with the tax code of.

Excellent and really appreciate all the feedback today from everyone. I hope it gives everyone some good thoughts to go into this tax season with to make sure that you are planning your tax strategy for your business appropriately. So Eric, Jarett, Austen, thanks so much for being on today. Yeah. Thank you so much.

And I just see this quick question from Ashley [00:27:00] here in the chat about equipment machinery. Does that fall into the r d credit claim? So depreciable equipment is typically would not qualify. We mainly want to hone in on things like the raw materials used for prototyping and those salaries and stuff like, Perfect.

Thanks. Question for answering that as well. All right. Thanks so much everyone. Yeah, thanks everyone. Thanks. Appreciate it. Bye-bye. Bye.