By Peter A. Berdon as seen on thebeveragejournal.com
Much attention has been paid to the impact on the lowering of corporate rates with the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA also has several provisions that will impact the beverage alcohol industry. While an in-depth analysis of the nearly 1000 page bill is beyond the scope of this article, below are the key highlights of changes to the federal excise tax, treatment of deprecation and the capitalization of interest requirements.
Excise Tax Reductions
The reductions to the alcohol excise tax rates applicable for wine, beer and spirits is the most direct and industry specific benefit of the TCJA.
Craft brewers will see a significant reduction with rates for malt beverages being slashed in half, from $7.00 per barrel to $3.50 for the first 60,000 barrels. Larger producers will see a reduction from $13.50 per barrel to $13.34 for production from 100,000 to 6 million barrels. Additionally, the rules of tax free transfers between brewers have been relaxed to include transfers where there is no common ownership, but the receiving brewer takes responsibility to pay the excise tax.
Wine producers and importers will also benefit through a reclassification of wine rates. Under prior law wine with an alcohol content of 14% or less was taxed at the rate of $1.37 and wine with alcohol content over 14% was taxed at $1.57 per gallon. Under the TCJA the allowable alcohol content for the lower rate is increased to 16%. More significantly, the credit against the wine excise tax was modified to all wine producers and importers, including sparkling wine, to utilize the credit. The credit amount is no longer phased out. The credit is $1.00 for the first 30,000 gallons, $0.90 for the next 100,000 gallons and $0.535 for the next 620,000 gallons.
Spirit manufacturers were not left behind, with a significant benefit for small producers. The TCJA reduces the tax rate from $13.50 to $2.70 for the first 100,000 proof gallons and $13.34 for all proof gallons in excess of that amount but less than 22,130,000 proof gallons. Bulk manufacturers may now transfer spirits in approved containers other than bulk containers in bond without the payment of the excise tax.
For all three categories, the TCJA imposes certain “control group” rules to thwart circumvention of the reduced rates by dividing production among multiple entities.
The applicability of these provisions is limited to tax years 2018 and 2019.
Cost Recovery Provisions
While not specific to the alcohol beverage industry, the TCJA increases the benefits of accelerated deprecation under Section 179 of the Tax Code. Expenditures for capital items are usually subject to deprecation rules which require that the expense be apportioned over the useful life of the item. Prior law provided an exception that allowed taxpayers to elect to deduct the cost of qualifying property with an annual limit of $500,000 (adjusted for inflation for years after 2015), subject to reduction for property costing more than $2 million. The TCJA increases these amounts to $1 million and $2.5 million respectively for tax years after 2017. Further, the TCJA expands the definition of qualified real property to include improvements to nonresidential real property such as roofs, heating, ventilation, air conditioning, fire protection, and security systems
The benefit of electing Section 179 deprecation is that the deduction for capital expenses can occur in the same year the cash outflow occurs (subject to the limitations above); thus accelerating the tax savings. The expended limits will certainly assist craft producers and the expended definition of qualified real property will benefit all tiers including retailers who desire to make physical improvements to their premises.
Tax Accounting Method Provisions
The uniform capitalization (UNICAP) rules require certain interest expenses to be included in the costs of goods. Prior to the TCJA aging was included as part of the period of production. The TCJA excludes aging from the production period for the purposes of the UNICAP interest capitalization rule, allowing producers to deduct interest expenses attributable to a shorter production period. Like the excise tax reduction period, this change applies only to the tax years 2018 and 2019.
While the reduction in excise taxes has the most direct impact on the beverage alcohol industry, one must also become familiar with the myriad of changes affecting businesses in general to understand the impact on one’s own business.