2018 Tax Alert - Beer, Wine, and Distilled Spirits Industry Section
The following is the Individual Taxation section of the 2018 client advisory "Tax Alert: How the New Tax Laws Will Affect You Now and in the Future."
The full version of this client advisory is available here.
The Act makes numerous temporary changes to how beer, wine, and distilled spirits are taxed. The changes are only effective for the 2018 and 2019 tax years.
UNICAP – A significant change to how beer, wine and distilled spirits are taxed includes changes to the modification of the Uniform Capitalization ("UNICAP") rules under section 263A, which require certain direct and indirect costs allocable to real or tangible personal property produced (or acquired for resale) to be included in inventory or capitalized into the basis of the related property. In the case of interest expense, the UNICAP rules apply only to interest paid or incurred during the property's production period and that is allocable to property: (1) with a class life of at least 20 years; (2) that has an estimated production period exceeding two years; or (3) that has an estimated production period that exceeds one year and a cost exceeding $1,000,000.
For property that is customarily aged such as wine and whiskey, before it is sold, the production period includes the aging period. Pursuant to the provisions of the new law, the aging periods for beer, wine, and distilled spirits are now excluded from the production period for purposes of the UNICAP interest capitalization rules. Consequently, producers of beer, wine, and distilled spirits are able to deduct interest expense (subject to any other applicable limitation) attributable to a shorter production period.
Excise Tax (Beer) – The Act also makes changes to the federal excise tax imposed on brewers and importers of beer. The Act reduces the tax on beer from $18 per barrel to $16 per barrel on the first six million barrels brewed by the brewer or imported by the importer. Beer brewed or imported in excess of the six million barrels would be taxed at $18 per barrel.
For small brewers producing less than 2 million barrels of beer, tax would be reduced from $7 per barrel to $3.50 per barrel for the first 60,000 barrels. The additional barrels would be taxed at $16 per barrel.
Special rules apply for determining controlled groups and allocation of the reduced tax rates among members of the controlled group. Moreover, it provides that two or more entities (whether or not under common control) that produce beer under a similar brand, license, franchise, or other arrangement are to be treated as a single taxpayer for the reduced rates.
Excise Tax (Wine Producer Credit) – The Act also modifies the credit for small domestic producers of wine. The new law allows the credit to be claimed by foreign and domestic producers of wine, regardless of the gallons of wine produced. The new law also allows the credit for sparkling wine producers.
Under the new law, the credit for wine produced in, or imported into, the United States during the calendar year would be:
$1.00 per wine gallon for the first 30,000 wine gallons; plus
$0.90 per wine gallon for the next 100,000 wine gallons; plus
$0.535 per wine gallon on the next 620,000 wine gallons.
The Act provides special credit rates for hard cider, as well as rules for allowing foreign producers of wine to assign the credit to importers of the wine. In addition, the new law provides a two-year, $0.50 per wine gallon rate reduction for still wines with an alcohol content of more than 14% but less than 16%. Mead and sparkling wines are taxed at the lowest rate applicable to "still wine".
Excise Tax (Distilled Spirits) – The excise tax on distilled spirits is also modified and taxed at a tiered rate. Under the law, the first 100,000 proof gallons of distilled spirits are taxed at a rate of $2.70 per proof gallon. The tax rate for proof gallons greater than 100,000 but less than 22,130,000 proof gallons would be $13.34 per proof gallon, and the rate for 22,130,000 proof gallons or more would be $13.50 per proof gallon. Further distilled spirits can be transferred in bond between bonded premises in containers other than bulk containers without payment of tax.
The Act has made substantial changes to the tax laws. There are many "glitches" in the Act that will need to be addressed in technical correction legislation. Since technical correction legislation requires a 60% vote in the Senate (it cannot come under reconciliation rules), there will need to be bi-partisan cooperation to fix the problems that such fast paced passage of the Act produced. Second, technical corrections require unanimous consent by both the majority and minority staffs of the House Committee on Ways and Means and the Senate Finance Committee. If anyone disagrees about the legislative intent of a provision and whether the statute reflects that intent, then the provision is not a technical correction but, rather, a change in policy. Thus it may take quite a while for any technical correction legislation to be passed.
Effective tax planning including choice of entity structures will be made based on the new laws that are now in effect. Only time will tell how these changes will impact individuals, businesses, and the economy.
This communication is intended for general information purposes and as a service to clients and friends of Verrill Dana, LLP. This publication, which may be considered advertising under the ethical rules of certain jurisdictions, should not be construed as legal advice or a legal opinion on any specific facts or circumstances, nor does it create attorney-client privilege.