Authored by Rob Kane
As tax reform continues to evolve, the current drafts of the House and Senate Bills present tax planning opportunities and challenges for craft breweries across the board. Based on the size of your brewery, these changes could have a large impact on your bottom line. Below are some craft brewery specific tax provisions you need to know about.
Under current law, Federal excise taxes are imposed on beer at a rate of $18 per barrel (31 gallons) and small brewers are subject to a reduced tax rate of $7 per barrel on the first 60,000 barrels of beer domestically produced and removed each year. According to the proposed Senate legislation, small brewers are defined as brewers producing fewer than two million barrels of beer during a calendar year. The Senate Bill would reduce the rate of tax on beer to $16 per barrel on the first six million barrels brewed by the brewer or imported by the importer. For small brewers, the tax rate would be reduced to $3.50 per barrel on the first 60,000 barrels domestically produced and then $16 per barrel on any further barrels produced. This could have an immediate impact of over $200,000 on your bottom line.
|Excise tax||Brewer size||Senate definition||Tax levels||Current law||Proposed|
|Large||Brewers producing more than 2MM BBLs annually||Volume > 6MM BBLs||$18.00||$18.00|
|Initial 6MM BBLs produced||$18.00||$16.00|
|Small||Brewers producing less than 2MM BBLs annually||Volume > 60,000 BBLs||$18.00||$16.00|
|Initial 60,000 BBLs||$7.00||$3.50|
'Craft Brewer' as defined by the Brewers Association, must be small, independent and traditional.
Small: Annual production of 6 million barrels of beer or less
Independent: Less than 25% of brewery is owned or controlled by an alcoholic beverage industry member that is not itself a craft brewer
Traditional: A brewer that has a majority of its total beverage alcohol volume in beers whose flavor derives from traditional or innovative brewing ingredients and their fermentation. Flavored malt beverages (FMBs) are not considered beers.
Under the House Bill, the pass-through tax rate (tax on S corporations and partnership income) will be capped at 25 percent on business income. In the past, brewery income could be taxed as high as 39.6 percent. Owners of active trades or businesses will be able to treat 30 percent of active business income as being subject to the 25 percent rate while the remaining 70 percent of active business income will be taxed at ordinary rates. Owners of passive trades or businesses will be able to treat 100 percent of the income as being eligible for the 25 percent rate. Under the Senate Bill, an owner of a pass-through craft brewery will be able to deduct 17.4 percent of qualified business income. This deduction is generally limited to 50 percent of the W-2 wages of the taxpayer with qualified business income from a pass-through entity. The W-2 wage limit does not apply in the case of a taxpayer with taxable income not exceeding $500,000 for married individuals filing jointly or $250,000 for other individuals.
|Pass-through tax||Bill version||Activity level||Current law||Proposed|
|House||Active||39.6% top rate||30% of business income taxed at 25% rate, remaining 70% taxed at ordinary rate|
|Passive||39.6% top rate||100% of business income taxed at 25% rate|
|Senate||Active||39.6% top rate||Deduction equal to 17.4% of qualified business income, limited by 50% of W-2 wages*|
|Passive||39.6% top rate||Deduction equal to 17.4% of qualified business income, limited by 50% of W-2 wages*|
*Wage limitation does not apply if taxpayer’s income is less than $500,000 (MFJ)/$250,000 (other)
Under the House and Senate Bills, the bonus depreciation rules would be increased from 50 percent to 100 percent bonus depreciation for property acquired after September 27, 2017 and before January 1, 2023. This means brewers will be able to deduct the full cost of new equipment in the year acquired. In addition, under the House Bill, used equipment also qualifies for the increased deduction.
|Bonus depreciation rules||Bill version||Property type||Current law||Proposed|
|House||New||Eligible for 50% bonus depreciation||Eligible for 100% bonus depreciation|
|Used||Not eligible||Eligible for 100% bonus depreciation|
|Senate||New||Eligible for 50% bonus depreciation||Eligible for 100% bonus depreciation|
|Used||Not eligible||Not eligible|
Under the House Bill, the interest expense deduction will be limited for interest expense in excess of 30 percent of the business’s adjusted taxable income. The Senate Bill would apply this limitation at the taxpayer level rather than at the entity level. With that being said, the House Bill provides an exception from the limitation for small businesses with under $25 million average gross receipts. Under the Senate Bill, the exception would apply to small businesses with under $15 million average gross receipts.
|Interest expense deduction||Bill version||Level||Current law||Proposed||Small business exception|
|House||Entity||No limitation||Limited to 30% of adjusted taxable income||< $25 million average receipts|
|Taxpayer||No limitation||Limited to 30% of adjusted taxable income||< $15 million average receipts|
Currently craft beverage companies are able to utilize the deduction for income attributable to domestic production activities (DPAD). This deduction is typically 9 percent of the related brewery taxable income, so a large benefit for brewers will be no longer. The House Bill would repeal this deduction effective for tax years beginning after 2017. The Senate Plan would repeal this deduction for tax years beginning after December 31, 2018. For a brewery with $150,000 of taxable income, an estimated deduction of $13,500 would no longer be available.
|DPAD deduction||Bill version||Current law||Proposed|
|House||Deduction for 9% of qualified production activities income||Full repeal of deduction for tax years beginning in 2018|
|Senate||Deduction for 9% of qualified production activities income||Full repeal of deduction for tax years beginning in 2019|
As Valued Business Advisors, Baker Tilly is dedicated to helping craft beverage companies navigate the challenges and seek out opportunities presented by changes in governmental legislation, regulations and policies. Planning ahead is crucial in sustaining best business practices for craft breweries.
For more information on tax reform as it relates to craft breweries, or to learn how Baker Tilly craft brewery specialists can help you, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.