With a new year comes new tax legislation, of which a number of provisions will have a significant effect on breweries. All in all, the changes should have a positive impact on most.
First and foremost is the inclusion of the reduced excise tax on small brewers, which has been in the works for years. The largest reduction is for those brewers producing fewer than two million barrels on an annual basis. The tax on the first 60,000 barrels of production is reduced from $7 per barrel to $3.50, effectively halving most breweries’ excise tax burden. For those producing more than 60,000 barrels but below two million, the tax is reduced from $18 to $16 or $200,000 of savings for every 100,000 barrels produced over 60,000. For larger brewers producing in excess of two million barrels, the rate is reduced on the first six million from $18 to $16.
Bonus depreciation on qualifying assets, which has been at 50 percent and was scheduled to decrease to 40 percent in 2018, has been bumped up to 100 percent expensing for assets placed in service after Sept. 27, 2017 through Dec. 31, 2022. Bonus depreciation will decrease after Dec. 31, 2022. Additionally, assets had to be purchased new in order to qualify in the past. No longer. Used equipment will now qualify for the 100-percent bonus depreciation deduction for assets placed in service after Sept. 27, 2017. So any tanks, brewing equipment, forklifts, etc. that are purchased and placed in service after Sept. 27, 2017 will be able to be expensed 100 percent.
The new tax law has limited the deduction businesses can take on business interest expense for those businesses with revenues in excess of $25 million. Business interest is now limited to 30 percent of taxable income before tax, depreciation and interest. Any disallowed interest in a given year can be carried forward. For example, a brewery with $1 million of taxable income before depreciation and interest expense, with $500,000 of interest paid during the year, would only be allowed a $300,000 deduction, with $200,000 carried forward indefinitely.
Also on the downside, the domestic production activities deduction or DPAD, has been repealed. DPAD was a 9 percent deduction from income for qualifying production or manufacturing in the U.S. This was a nice deduction for breweries, but may be offset for some by the newly reduced business tax rates.
The corporate tax rate for C corporations has changed from a tiered tax with a top rate of 35 percent to a flat tax rate of 21 percent. This will be beneficial for large breweries, but not as much for others. For any breweries that are flow-through entities, such as S corporations, partnerships or LLCs, there is a deduction for up to 20 percent of the qualifying business income, subject to some limitations.
Finally, there have been some potentially favorable changes related to acceptable methods of accounting, including inventory accounting that could be very beneficial to breweries.
Be certain to discuss how these changes and all of the new tax provisions affect your business with your tax professional. •