Accounting for Alternating Proprietorships & Contract Distilling
One increasingly common practice in the liquor industry
What to do When Contract Distilling
Contract distilling means that only the distiller has to keep the TTB happy. The person or company paying for someone to do it is free and clear. Distillers are still making the spirits, and they have to keep track of everything they make, use, and do from general record keeping to labeling and scheduling. This includes paying all the relevant taxes once the hooch leaves the distillery. In other words, a distiller has to take steps to make sure they keep their records in perfect order. As always. It can’t be passed on to whoever contracted out the work.
There are many reasons why a distillery will take on contract work. It could be producing a base spirit that will have flavoring added to it later so that it meets a particular brand’s taste profile. Or it could be a case where some non-alcohol related business wants a short run of booze with their brand on it as a marketing stunt. I’m surprised more bands and musicians don’t do this.
Whatever the reason is, there are things to keep in mind.
Federal Excise Taxes Contract distilling makes tracking federal excise taxes more challenging. Records for each client must have their own separate entry that has to be then consolidated into the distillery's company-wide records. They literally have to be both separate and included. Trying this with generic accounting software like QuickBooks would make your head explode. Hoochware was built specifically to handle this sort of tax law insanity, so it becomes a relative breeze.
Keeping TTB and DRO (Distiller Report of Operations) Accurate Maintaining a distillery's books is one thing, but generating reports that summarize things and makes it easy to understand to the feds and non-accountants is another. Hoochware generates reports that follow production, step by step, day by day. This lets users get the reports for what was done, when it was done, how much was done, and for who.
This doesn’t happen much in the distilling industry, but it isn’t unheard of. Alternating proprietorships is when two different distilling companies use the same distillery. One is usually the official owner, while the other proprietor rents the space during said owner’s down time. Surprise, surprise, this creates other bookkeeping hurdles generic accounting software can’t handle such as,
- Who produced what and when
- Who owns or rents what
Proper labeling, including the certificates of label approval (COLA’s) getting recorded correctly
And the paying of taxes when any liquor produced leaves the distillery.
Getting these things right is as important as it can be difficult to do. This applies in particular if there is shared inventory or some other pool of resources or talent. Depending on the ingredients, raw materials, and effort involved, these inventories could have vastly different values.
QuickBooks Doesn’t Cut It
Or any other generic accounting software for that matter. They fail in alternating proprietorships because they can’t handle it when one inventory item has two different costs for each owner.
Getting the TTB Reports Done Right
The last thing a distillery wants is the TTB asking questions because generic accounting software made something that should be easy to understand a convoluted mess. There are better ways for the people running a distillery to spend their time than explaining what was made, and by whom, to the feds, because QuickBooks threw all the numbers into their balancing blender.
Hoochware keeps everything from each entity involved with contract distilling and alternating proprietorships separate and apart by only associating the individual brands with the owner of the brand. This includes the production process where the steps, equipment, and raw materials are compartmentalized correctly to the proprietor. This keeps costing accurate.
It also makes creating reports for each brand easy. Select the one you need the report for and print. With a couple of mouse clicks reports (DRO, Excise Tax, and TTB) can be generated for each proprietor, or other brand made in the distillery. All the info is separate, and where it needs to be.
This is the advantage of having accounting software specifically built for distilleries from the ground up. How to handle all those little quirks of the industry, plus the rules and requirements of the regulatory bodies are built in organically. This means a lot of saved hours manually sorting out each expense, and creating reams of spreadsheets. Some distillery accounting software is still built on top of generic accounting software or syncs with the generic software like QuickBooks, meaning it still doesn’t handle things like contract distilling or alternating proprietorships well. Stick with the right tools, and you won’t go wrong.