While the Tax Cuts and Jobs Act of 2017 (“the Act”) affects many small businesses, alcohol producers are among the few industries that have been specifically targeted for relief. In addition to rate changes and additional deductions that are available many businesses, the Act benefits craft breweries, wine producers, and distilleries by temporarily reducing the federal excise tax on certain alcohol production and favorably altering interest capitalization rules. These changes are designed to spur growth in these industries and should aid start-ups and existing small businesses.
Changes to Excise Tax Rates
In addition to the federal taxes imposed on most businesses, producers of alcohol have historically been subject to federal excise taxes. Although the Act does not eliminate these taxes entirely, it significantly decreases their impact on small breweries, wineries, and distilleries.
Section 5051 of the Internal Revenue Code (“I.R.C.”) currently provides that, in general, breweries must pay a tax of $18 on every barrel of beer brewed or produced for consumption. For those producing less than 2,000,000 barrels of beer in a calendar year, the rate of tax is only $7 per barrel on the first 60,000 barrels brewed or produced domestically. I.R.C. § 5051(a)(2).
The Act significantly decreases the applicable excise tax rates for 2018 and 2019. For any beer brewed or produced in the United States, the rate of tax will only be $16 per barrel on the first 6,000,000 barrels produced; however, for those producing less than 2,000,000 barrels in a calendar year, the rate of tax is only $3.50 on the first 60,000 barrels brewed or produced domestically. For the next two years, this means that many craft breweries will pay half as much in federal excise taxes.
The Act also provides significant reductions to the excise tax rates applicable to wineries. Currently, pursuant to I.R.C. § 5041(b), producers are subject to an excise tax of $1.07 per gallon for wines of less than 14% alcohol by volume and $1.57 per gallon for wines that contain between 14% and 21% alcohol by volume. (Other rates apply to other types of wine.) For many wineries, these taxes were offset by a $0.90 per gallon credit on the first 100,000 gallons of wine produced. As a result of the changes in the Act, the credit has been increased to $1.00 per gallon for the first 30,000 gallons of wine produced during 2018 and 2019. The credit is equal to $0.90 per gallon on the next 70,000 gallons of wine produced and $0.535 per gallon on the next 520,000 gallons produced. In effect, for many small producers, the net excise tax after credits will be reduced from $0.17 per gallon to $0.07 per gallon (or a 59% reduction). The Act also changes the threshold for the lower excise tax rate from 14% alcohol by volume to 16% alcohol by volume, which will have the effect of reducing the tax rate for many other wines for the next two years.
Finally, for distilleries, the excise tax rates under I.R.C. §5001 have been reduced for 2018 and 2019. Under the Act, the generally applicable excise tax per proof gallon on the first 100,000 proof gallons of distilled spirits is reduced to $2.70 and, on the next 22,030,000 proof gallons, is reduced to $13.34. (A “proof gallon” is one liquid gallon of spirits that is 50% alcohol by volume.) Since the current excise tax rate on distilled spirits is $13.50/proof gallon, for small distilleries, this represents an 80% reduction in the applicable excise tax rate.
Changes to UNICAP Rules
Aside from a temporary reduction in the federal excise tax rate, craft breweries will also benefit from a change to section 263A of the Internal Revenue Code. Section 263A generally provides that an inventory-producing taxpayer may not claim an immediate deduction associated with the costs or producing that inventory. Under tax accounting principles, those costs are to be capitalized and deducted only when the inventory is sold (i.e., uniform capitalization or UNICAP). This principle may require that certain indirect costs of production – such as interest payments on capital used in the production process or managerial salaries – be allocated to inventory items and may require deferral of the expense.
While generally this is merely a timing difference (and may only postpone certain expenses for a year, particularly where there is high inventory turnover), it can nonetheless increase current year taxes. For start-up craft breweries, where significant debt may be incurred to acquire the brewery or the machinery used to brew the beer, Section 263A can effectively delay the deduction of interest expenses.
As amended in the Act, the “production period” of beer under Section 263A does not include any aging period for the years of 2018 and 2019. By eliminating the aging period from the “production period,” interest expenses would be attributable to a shorter production period. As a result, less interest expense may be capitalized and, in certain circumstances, interest will be deductible earlier.
Other Considerations for Alcohol Producers
While the aforementioned changes specifically target craft breweries, wine producers, and distilleries, owners of these businesses should consider other changes in the Act and relevant state legislation that may impact their bottom line, such as:
- Reduction to Federal Corporate Income Tax Rate
- Creation of Deduction for Certain Pass-Through Business Owners
- Changes to Net Operating Loss Provisions
- Changes to Expensing and Depreciation Rules
- Repeal of the Domestic Production Activities Deduction
- Proposed State Legislation (e.g., Reform on Tap Act of 2018)
If you operate a craft brewery, vineyard, or distillery or are considering starting one, you should consult a professional to take advantage of these changes. Aside from changes to federal tax laws, state laws and regulations can play a significant role in the profitability of a brewery, wine producer, distillery, brew pub, or other business involved in the production, distribution, or sale of alcohol. The professionals at Rosenberg Martin Greenberg, LLP have experience in these industries and can implement strategies to effectively maneuver the changing regulatory environment. For a free consultation, please contact Brandon N. Mourges at (410) 951-1149 or firstname.lastname@example.org or Seth J. Groman at (410) 649-1244 or email@example.com.