A year ago, we were all scrambling to understand the implications of the recently passed tax overhaul, colloquially known as the Tax Cuts and Jobs Act (TCJA). As expected with any legislation passed as quickly as this was, we were left with a number of unanswered questions and various interpretations of the new law. August saw the introduction of proposed regulations which served to clarify a number of these questions. Even though several items remain which we expect to be changed with technical corrections, at least we now have some guidance to go on.
The deduction for qualified business income or QBI, is one of the biggest changes to the tax code for non-C-corporation taxpayers. This deduction was provided in response to the reduction in the C-corporation tax rate from a sliding scale that reached 35 percent to a flat rate of 21 percent. Eligible taxpayers receive a deduction of up to 20 percent on their individual returns for any qualified trade or business income reported to them. Most breweries set up as partnerships or S-corporations will receive this deduction, although the deduction can be limited based on total individual income, wages paid to employees and the unadjusted basis of depreciable property. You should make sure you discuss the new deduction with your tax advisor to understand how these limitations may affect you and whether there are ways to mitigate them. One of the biggest questions surrounding the QBI was whether rental property would qualify. For brewery owners who also own their buildings outside the operating entity, it will likely qualify. For other commercial rentals, it will depend on the level of control over the activities of the rental. A triple net lease indicates a lack of decision-making power. Adjusting lease agreements to fit within the parameters of the QBI deduction may be a worthwhile endeavor.
Another advantageous change for breweries is the expansion of options related to accounting for inventory. If your business — including the aggregation of any affiliated businesses — is under $25 million in gross revenue over a three year rolling average period and you are a qualifying entity, you can make some elections to reduce your inventory capitalization and increase deductions. First, for tax purposes, most breweries will be subject to uniform capitalization rules known as 263A, an IRS requirement to capitalize certain administrative costs into year-end inventory. Under the new legislation, you may elect out of this requirement. Additionally, you may also opt out of certain other inventory requirements and may now capitalize only your non-incidental materials. This essentially allows you to expense labor and overhead. Again, make sure you discuss this opportunity with your tax advisor to verify that you qualify for these options.
Last, be aware of the new limitation on the amount of business interest allowed to be deducted for larger businesses and certain disqualified business structures. If your aggregated gross receipts for all affiliated companies is less than $25 million and you are not disqualified as a tax shelter, you are not subject to this limitation. If you fail either test, your business interest deduction is limited to 30 percent of adjusted taxable income. Any disallowed interest in a given year will carry forward until it is able to be utilized.
A number of other changes are out there — changes that may have significant impacts on your brewery or personal tax situation. As always, make sure you discuss with your tax advisor to understand all potential implications. •
This information was provided by Matthew Diment, of Kernutt Stokes, CPAs and Consultants. Matthew and a team of professionals serve the craft brewing industry. For questions or more information, contact Matthew at (541) 687-1170 or email@example.com.