There are numerous tax savings opportunities that have favorable effects on profitability for all craft breweries and distilleries, but careful planning and strategy is required to maximize these tax benefits.
As a result, it’s important that businesses operating in this industry have a comprehensive understanding of new tax rules and effective strategies so they are positioned to maximize tax savings.
Below are the top four things that breweries and distilleries should know about strategic tax planning in order to take advantage of their unique savings opportunities.
1. Your Expenses and Activities May Qualify for the Research and Development Credit.
Many taxpayers commonly believe that the research and development (R&D) tax credits are only available to high-tech businesses creating new products.
However, R&D credits are available to all types of businesses that attempt many different kinds of technically challenging projects. In fact, businesses don’t even have to succeed in their experiments to qualify.
For many businesses, this may look like creating or improving a product or process. For breweries and distilleries in particular, qualified research and development activities may take the form of investing in, developing, designing or testing any of the following:
- The fermentation and distillation process;
- The bottling and packaging processes;
- Product formulation; and
- Prototype batches.
Eligible businesses can use the research and development credit in multiple ways:
- The Tax Cuts and Jobs Act (TCJA), more commonly known as “tax reform,” expanded the accessibility of the R&D tax credit to specific taxpayers. For instance, the AMT provision was eliminated for corporations, which allows for corporations to potentially offset their federal income tax liability with R&D.
- Because many breweries and distilleries are still in the startup phase, it’s important to note that eligible small businesses are able to apply the R&D tax credit against payroll taxes for up to five years.
- It’s also important to point out that the payroll-tax offset research and development credit cannot be applied on an amended return.
Craft breweries and distilleries that haven’t previously applied the research and development credit to their businesses can amend returns that are still considered to be open under the statute of limitations (typically three years) in order to claim any missed opportunities.
2. The Federal Excise Tax Rate has been Reduced.
The TCJA contained a provision known as the Craft Beverage Modernization and Tax Reform Act—legislation that was designed to benefit breweries and distilleries and significantly reduced the per-barrel excise tax rates that large and small craft breweries and distilleries pay through 2019.
For the first 100,000 proof gallons that distilleries produce in 2018 and 2019, they can receive a reduced federal excise tax rate of $2.70 per proof gallon. In addition, craft breweries received a reduced rate of $3.50 per barrel on the first 60,000 barrels for domestic producers with less than two million barrels annually.
These significant decreases in federal excise taxes create an opportunity for many in the industry to reinvest available funds back into their craft brewery or distillery.
The Tax and Trade Bureau has informed those in the industry that many breweries and distilleries are still paying the higher rate per barrel because they aren’t aware of these changes in light of tax reform. If you suspect that this is the case for your brewery or distillery, please consider submitting for a refund to retrieve the amounts that were overpaid.
The provision is set to expire December 31, 2019, but lobbyists in the industry are currently working on reintroducing the bill to Congress in order to make its provisions permanent.
3. Accelerated Depreciation Methods Can Help with Equipment Purchases.
The initial costs of new equipment for any brewery or distillery can be very expensive, and even replacing old or damaged equipment can be financially challenging.
Tax reform expanded on two accelerated depreciation opportunities that can be particularly beneficial for breweries and distilleries—especially to those just starting or expanding in the industry. When implemented, both of these accelerated depreciation strategies can result in significant tax savings for many craft breweries and distilleries with plans to purchase new or used equipment:
- Thanks to tax reform, businesses can now deduct 100% of the cost of new or used tangible personal property with a useful life of 20 years or less and that is placed in service after September 27, 2017 and before January 1, 2023.
- The TCJA also expanded Section 179 depreciation expensing, which is beneficial to many craft breweries and distilleries. This allows for the immediate expensing of eligible property up to $1 million, and the phase-out has been increased to $2.5 million for property placed in service after December 31, 2017.
Such benefits can be further maximized through the implementation of a cost segregation study, which allows businesses that have constructed, purchased, expanded or remodeled their buildings and real estate assets to accelerate depreciation deductions and defer federal and state income taxes.
Examples of equipment that breweries and distilleries should include in their tax evaluations are: grain silos, mills, weighing systems, mash tuns, pumps, lauter tuns, wort grants, coolers and aerators, brew kettles, yeast handling systems, fermenters, bright beer tanks, filters and a variety of other tanks for mixing and storage.
4. The 199A Pass-through Deduction May Offer Savings.
The passage of the TCJA created a new 20% deduction for qualified business income from a partnership, S corporation or sole proprietorship through December 31, 2025.
There are taxable income limits on the calculation of this deduction. For example, the deduction could be subject to a limit on either wages paid or wages paid plus unadjusted basis immediately after acquisition (UBIA) of qualified property.
This deduction can potentially benefit many craft breweries and distilleries, but the calculation can often be very complicated with many nuances, so it’s important to consult a tax advisor.
Moving Forward with Strategic Tax Planning for Breweries and Distilleries
Every business is unique, and each has different needs. The best way to effectively position your business with the best tax strategy is to partner with a tax advisor who understands your industry and tax law.
For more information or for insight that’s specific to your organization, connect with a Warren Averett advisor.