With a new year comes new tax legislation, of which a number of provisions will have a significant effect on breweries. All in all, the changes should have a positive impact on most breweries.
First and foremost is the inclusion of the reduced excise tax on small brewers, which has been in the works for years. The largest reduction is for those brewers producing fewer than 2 million barrels on an annual basis. The tax on the first 60,000 barrels of production is reduced from 7$ per barrel to $3.50, effectively halving most breweries’ excise tax burden. For barrels produced over 60,000 and below 2 million, the tax is reduced from $18 to $16 or $200,000 of savings for every 100,000 barrels produced over 60,000. For larger brewers producing in excess of 2 million barrels, the rate is reduced on the first 6 million barrels from $18 to $16. Although currently set to run only through 2019, it will be a significant savings for craft breweries.
Bonus depreciation on qualifying assets, which has been at 50% and was scheduled to decrease to 40% in 2018 and has been bumped up to 100% expensing for assets acquired and placed in service after September 27, 2017 through December 31, 2022. Additionally, in the past, for an asset to qualify it had to be purchased new. No longer. Used equipment will now qualify for the 100% bonus depreciation deduction for assets placed in service after September 27, 2017. So any tanks, brewing equipment, forklifts, etc. that are acquired and placed into service after September 27, 2017 will be able to be expensed 100%. Take heed regarding the definition of acquired for this purpose. Any commitment to purchase equipment prior to the September effective date will be subject to the previous bonus rules. This will apply to any construction in process at that date.
The new tax law has limited the deduction businesses can take on business interested expense for those businesses with revenues in excess of $25 million. Business interest is now limited to 30% of taxable income before tax, depreciation, and interest. Any disallowed interest in a given year can be carried forward. For example, a brewery with $1 million of taxable income before depreciation and interest expensive, with $500,000 of interest paid during the year, would only be allowed a $300,000 deduction, with $200,000 carried forward indefinitely.
Also on the downside, the domestic production activities deduction or DPAD, had been repealed. DPAD was a 9% deduction from income for qualifying production or manufacturing in the United States. This was a nice deduction for breweries but may be offset for some by the new reduced business tax rates.
The corporate tax rate for C-Corporations has changed from a tiered tax with a top rate of 35% to a flat tax rate of 21%. This will be beneficial for large breweries but not as much for others. For any breweries that are flow-through entities, such as S-Corporations, Partnerships, or LLCs, there is a deduction for up to 20% of the qualifying business income, subject to some limitations.
Finally, there have been some potentially favorable changes related to acceptable methods of accounting including inventory accounting which could be very beneficial to breweries. Previously, a company had to average gross receipts of $1 million or less to be exempt from code section 471 treatment. Under the new law, any company averaging less than $25 million over the prior three tax years will qualify. This exception requires only non-incidental materials (raw materials) to be capitalized for inventory purposes, allowing the expensing of labor and overhead costs. it also eliminates the UNICAP rules for those companies, no longer requiring a capitalization of 263A or indirect costs for tax purposes. This may simply inventory accounting for smaller breweries and will provide an initial year deduction for those that choose to adopt this accounting method change.
Be certain to discuss how these changes and all of the new tax provisions can impact your business with your tax professional.
This article was provided by Matthew Diment, CPA.