On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. Within the legislation, which became effective January 1, 2018, under Part IX, Subpart A, is the Craft Beverage Modernization and Tax Reform (CBMTR). The CBMTR section of the new law is effective until it’s scheduled to sunset on December 31, 2019.
This long-anticipated change to federal excise taxes creates a more equitable tax structure for distillers, brewers, winemakers, and importers of beverage alcohol by equalizing the federal excise tax on spirits, beer, and wine.
One provision impacts all three industry segments. Wine, beer, and spirits would be considered finished and no longer subject to interest capitalization after the manufacturing process.
Previously, that threshold was met when alcohol was first held for sale. Now, the aging process is no longer considered part of the production process for purposes of capitalizing interest into inventory, allowing wineries, breweries and distillers to expense postproduction interest costs.
Here’s a breakdown of how key provisions of the CBMTR may impact each industry segment, specifically.
- The federal excise tax would be reduced to $3.50 per barrel from $7.00 on the first 60,000 barrels for domestic brewers producing fewer than two million barrels annually.
- The federal excise tax would also be cut to $16 per barrel on the first six million barrels for large brewers and beer importers while maintaining the $18 per barrel excise tax for barrels produced in excess of six million barrels.
- Brewers would be allowed to transfer beer between bonded facilities without excise tax payment.
Why It Matters
Small and mid-size craft brewers will likely benefit the most from the new law, especially on the reduction on excise tax on the first 60,000 barrels. The ability to transfer beer between bonded facilities without tax liability will likely encourage brewers to collaborate more on new beers by giving them more flexibility to transfer beer between breweries.
- A one dollar per gallon federal excise tax credit would be provided for the first 30,000 gallons produced; $0.90 for the next 100,000 gallons; and $0.535 for the next 620,000 gallons.
- Wineries could receive a maximum federal excise tax credit of $451,700 annually, assuming their production is over 750,000 gallons or 315,000 cases.
- Sparkling wine producers and wine importers also qualify for the new federal excise tax credits.
- Wines with alcohol levels above 14% up to 16% would be taxed at the lower $1.07 federal excise tax rate that previously applied to wines with less than 14% alcohol, rather than $1.57 per gallon as under prior law.
Why It Matters
Small and especially mid-size wineries will benefit most from the tax credit increase. However, the change in the tax rate on low alcohol by volume wines to 16% from 14% should be much more significant for larger wineries—although, this is a benefit for all wine producers.
- The federal excise tax rates will now be a tiered based on proof gallons. $2.70 per proof gallon on the first 100,000 proof gallons produced, then increased to $13.34 per proof gallon above that amount up to 22,130,000 of proof gallons. The rate increases to $13.50 on proof gallons above 22,130,000.
- The new law also provides rules that would prevent members of a controlled group from all receiving the lower rate.
Why It Matters
The new law reduces the federal excise tax on distilled spirits producers for the first time since the Civil War, according to the American Distilling Institute. The reduced rates are designed to help the more than 1,300 operating distilleries nationwide reinvest in their operations.
Beyond the CBMTR, several other changes included in the 2017 TCJA are expected to significantly impact brewers, distillers, and wineries, including:
- Graduated corporate—C corporation—tax rates are adjusted from 15% to 35% to a flat rate of 21%.
- Individual and pass-through entity tax rates have changed, including those for partnerships, LLC’s, and S corporations
- There’s a new 20% qualified business income deduction for flow-through entities and sole proprietorships through 2025.
- Bonus depreciation is doubled to 100%, and qualified assets have been expanded to include used assets—effective for assets acquired and placed in service after September 27, 2017.
- The Section 179 expensing limit has doubled to $1 million and the phaseout threshold has increased to $2.5 million.
- Farming business machinery and equipment used in a farming business is now five-year property, rather than seven-year property.
- Farming business machinery and equipment that’s three to 10-year property can use 200% double declining balance for depreciation purposes.
- Taxpayers with average annual gross receipts of less than $25 million are now permitted to use the cash method of accounting.
- Taxpayers with gross receipts of less than $25 million are exempt from the inventory accounting method under UNICAP.
- The Section 199 deduction, commonly referred to as the Domestic Production Activities Deduction (DPAD), is eliminated.
- The net operating loss (NOL) provisions have changed.
- New limitations on deductibility of certain expenses such as entertainment and interest expense have been introduced.
- The gift and estate tax exemption has doubled to $10 million, which is expected to be $11.2 million for 2018 with inflation indexing. This provision lasts through 2025.
One provision that didn’t change from the previous law is the tax treatment for last in, first out inventory accounting (LIFO), which remains untouched.
We’re Here to Help
For more information on how the new tax law could affect you or your business, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.