While watching congress has become a comedy show and people’s feelings on tax reform is all over the place, let’s take a look at some items that may be relevant to your brewery, once the president signs the Tax Cuts and Jobs Act into law. Note: this blog post only highlights some of the changes. Please consult your tax advisor and schedule a time to discuss planning and other changes, as well to maximizes your benefits under the new tax law.
1. Most important, the new tax law included the Craft Beverage Modernization and Tax Reform Act (CBMTRA) which the National Brewers Association has been working on for almost ten years! This reduces your federal excise tax on beer from $7 per barrel, to $3.50 per barrel, on the first 60,000 barrels produced by domestic brewers who produce less than two million barrels annually. It also allows for you to be more creative and collaborate with your peers by the removal of tax between bonded facilities. These changes will be effective January 1, 2018, so remember not to over pay when doing your BROP.
2. For small brewers with less complex operations, who operate tap rooms and turn inventory fast, or brewers who are just getting started, the new law makes your business tax return easier. If your gross receipts are $25 million or less during the preceding three years, you could be exempt from the complex inventory and accrual rules that were once required by the IRS. Not only could this help accelerate deductions, it can reduce your year-end tax preparation bill as there is less work to be done by your CPA.
3. The new tax law also expands the small business exception for UNICAP by increasing the gross receipts test from $10 million to $25 million and removes the interest charge for the aging period of your beer. Again, this benefit is another way to help reduce the complexity of your tax return and potentially accelerate deductions for indirect inventory costs that were once required to be capitalized as part of inventory. Brewers who have an extensive barrel aging program or age beer for more than a year will most certainly benefit from this.
4. Accelerated deduction under section 179 has been increased. Under old law, your accelerated deduction was limited to $500,000, reduced by the cost of eligible property placed in service that exceeded $2 million. The new law raises, subject to inflation adjustments, the limit from $500,000 to $1,000,000 and the start of phase down amounts is raised from $2 million to $2.5 million.
5. Bonus depreciation, another good benefit that got an overhaul also. Instead of taking 50% of the cost on eligible property, bonus depreciation has increased to 100% for property placed in service after Sept 27. 2017 and before Jan 1, 2023. NOTE – consult your tax advisor on the best strategies to utilize 179 and bonus. Sometimes, it may not make sense to go gung-ho on these if you anticipate profit growth in future years with a slowdown in your CAPEX spending.
6. Your business NOLS got a makeover! NOL Deductions are now limited to 80% of taxable income and you can no longer carry them back, but you can carry them forward indefinitely.
7. There is a 20% deduction for qualified business income for noncorporate taxpayers (LLC’s taxed as a partnership for example), subject to limitations. Consult your tax advisor now for planning opportunities as there are some significant complexities surrounding this substantial new deduction.
8. While not a win, the new tax law repeals the domestic production activity credit that many breweries take. This credit allowed certain breweries to take a deduction equal to 9% of the lessor of your qualified production activities income or taxable income for the tax year. BOO!
Again, not an extensive listing of all the changes that were signed into law under tax reform, but the above can have a significant impact on your operations. Please contact your tax advisor to start planning on how to maximize these benefits.
Robert Babine, CPA
Edelstein & Company