Posted by The TaxAdvocate Group, LLC

Brewing Interest: Influence of the Tax Changes on the Craft Brew, Winery, and Distillery Industries

Brewing Interest: Influence of the Tax Changes on the Craft Brew, Winery, and Distillery Industries

Even though the TCJA of 2017 hit several small businesses, a couple of these businesses enjoyed relief. While many enterprises want rate change and extra deductions, wine producers, distilleries, and craft all benefited from the ACT. This happened as the federal excise tax on some alcohol production was reduced.

These changes aimed to catalyze the growth of these firms and aid startups.


Changes on Excise Tax Rates

Alongside the federal taxes on many businesses, federal excise law is one of the burdens on alcohol producers. While the Act did not eliminate the tax altogether, the impact on wineries, small breweries, and distilleries was significantly reduced.

The applicable excise tax rate for 2018 and 2019 was decreased. For beers produced in the United States, the tax rate will be $16 per barrel exclusively for the first 6 million barrels. For industries producing less than 2 million barrels per year, they will be subjected to $3.50 on the first 60,000 barrels locally brewed. The implication of this is that craft breweries will only have to pay half of the federal excise tax. 

Based on the Act as well, there was some excise tax reduction for wineries. Based on IRC section 5041(b), producers will pay an excise tax of $1.07 per gallon of wine with less than 14% alcohol content. If the alcohol content is between 14% and 21% by volume, the rate is $1.57.

A lot of distilleries had their taxes offset by $0.90 per gallon. This applies to the first 100,000 gallons of wine. This ACT triggered a credit increase to $1 per gallon. This applies to the first 30,000 gallons of wine produced in 2018 and 2019. This credit translated to $0.90 per gallon for subsequent 70,000 gallons produced and $0,535 per gallon for the next 520,000 made.

The IRC section 5001 reduced the excise tax rate for distilleries. With this Act, the excise tax on the first 100,000 proof gallon came down to $2.70 for the distilled spirit. For the next 22 million proof gallons reduced to $13.34. This translated to 80% reduction in excise tax for small distilleries as the current excise rate on the distilled spirit is $13.50/proof gallon

We defined a proof gallon as a liquid gallon of spirit with 50% alcohol.


Adjustment to UNICAP Rules

Besides reducing the federal excise tax rate, some tweaks to section 263A of the IRC code also benefit craft breweries. According to this section, a taxpayer producing inventory cannot claim a deduction that has to do with the stock production.

According to tax accounting principles, you can only capitalize and deduct the cost when you sell the inventory. With the principle as well, some indirect costs of production should be allocated to inventory items.

Although this is generally a timing difference, it can help boost the year taxes. For craft breweries that are just starting, section 263A can help defer the deduction of interest expense. These are startups that require substantial costs.

Some amendments in the ACT excluded the aging period from the production period of the beer for the years 2018 and 2019. Since the aging period was removed from the production period, interest expenses only apply to a shorter period. With this, less interest expense can be capitalized, which supports the early deduction of interest in some cases.


A few considerations for Alcohol Producers 

Even though the changes we discussed here mainly target distilleries, breweries, and wine producers, other changes in the Act affect owners of such business. This also includes state legislation that might affect them. A few of these are:

  • Amendment to depreciation and expensing rules

  • Amendments to Net Operating Loss Provisions

  • Bringing down the tax rate for Federal Corporate Income


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