Housed within the Tax Cuts and Jobs Act (TCJA), which became effective January 1, 2018, is the Craft Beverage Modernization and Tax Reform (CBMTR) Act. This change to federal excise taxes creates a more equitable tax structure for distillers and importers of beverage alcohol by equalizing the federal excise tax on spirits, beer, and wine. For tax purposes, the bill defines alcoholic ciders as wine. Below is a summary of some of the key provisions of the CBMTR, which is scheduled to sunset on December 31, 2019.
Spirits will now be considered finished—and, therefore, no longer subject to interest capitalization—after the manufacturing process. Previously, that threshold was met when alcohol was first sold. Now, the aging process is no longer considered part of the production process, meaning wineries, breweries, and distilleries can expense post-production interest costs.
Additionally, the federal excise tax rates will now be 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, defined as any two or more corporations connected through stock ownership, from all receiving the lower rate.
Several other changes included in the 2017 TCJA are also expected to significantly impact distillers, including updated tax rates for various types of corporations (C and S corps, partnerships, and LLCs). There’s a new 20 percent qualified business income deduction for flow-through entities and sole proprietorships through 2025.
Bonus depreciation is doubled to 100 percent, and qualified assets have been expanded to include used assets (the change applies to assets acquired and placed in service after September 27, 2017). The Section 199 deduction, commonly referred to as the Domestic Production Activities Deduction (DPAD) and taken by many U.S. manufacturers and producers, is eliminated. In the past, the DPAD included gross receipts derived from the sale, exchange, lease, rental, licensing, or other disposition of qualified production property. The net operating loss (NOL) provisions have changed, and new limitations on deductibility of certain expenses, such as entertainment and interest expense, have been introduced.
The Section 179 expensing limit has doubled to $1 million and the phaseout threshold, which narrows the focus of the tax deduction benefit to small- and medium-sized businesses, has increased to $2.5 million.
Taxpayers with average annual gross receipts of less than $25 million in the three prior tax years can now use the cash method of accounting and are exempt from the inventory accounting method under UNICAP (aka “Uniform Capitalization,” an IRS tax concept that requires capitalization of all direct and indirect costs incurred in the production of real or tangible personal property. For example, a taxpayer would have to capitalize not only the direct costs of constructing a building, like paying employees, but also any indirect costs, like construction related depreciation.).
Why It Matters
CBMTR reduces the federal excise tax on distilled spirits producers for the first time since the Civil War, according to the American Distilling Institute. The objective is to encourage distilleries across the country to reinvest in their operations. To learn how these changes affect your company and how to adjust your business accordingly, consult your financial advisor or a tax professional.
Jeff Gutsch is a partner at Moss Adams and the national practice leader for its wine, beer, and spirits practice. Ryan Kuenzi is also a partner, serving clients in the manufacturing, distribution, food processing, agriculture, natural resources and hospitality industries. Kenny Martin is a senior manager and leader of the firm’s wineries and vineyards practice for the Oregon region. Founded in 1913 and headquartered in Seattle, Wash., Moss Adams LLP provides accounting, tax, and consulting services to public and private middle-market enterprises in many different industries.